Has the Housing Market Topped?

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If you’re reading this article, chances are you own real estate and it comprises a substantial portion of your net worth. If you owned property prior to the financial crisis, you witnessed the value of your real estate decline substantially only to rocket back in value since 2009. In fact, in some areas of the country values are now even higher than they were in the last housing bubble. The primary factors for increasing values since the financial crisis were an improving economy and declining interest rates driven by three rounds of quantitative easing by the Federal Reserve.


No one is talking much about real estate topping out; in fact it’s really just the opposite.  Most people are thinking about how much money they can make. But the herd is always behind the curve. The more advertisements you hear for home flipping seminars and the more home flipping shows you see on TV, the more you can discern that the market is really near or at the top. At Carden Capital we believe the feverish pitch currently enjoyed by the market is now near or at its peak. Likely the summer of 2016 will mark the peak of the current housing cycle.


There are several reasons for this prediction. First, high end real estate in the US and internationally has already been declining in price. High end buyers are not wage earners; they earn money on their investments, and their investments in the stock market have made no gains for the last year, or potentially even losses. Hence they are not willing to pay as much for luxury real estate. Lower and middle range real estate is holding up well still. Low and mid-range buyers are wage earners and borrowers. If they are still earning, they can pay, but they can only stretch so far, and that limit has been reached now. When the economy turns and unemployment rises, they will pay less. And lastly, if the Fed really does make do on its promises to raise interest rates, that will seal the deal because they will not be able to afford higher payments.


Hot luxury markets are cooling

Florida has always been a boom and bust market when it comes to real estate. The 2008 housing crisis hit the southern state particularly hard as mortgage defaults skyrocketed and home values plunged. However, values have come back strongly over recent years. Recently, the luxury market in Miami has experienced a downturn. The number of sales and prices in the poshest areas of Miami Beach fell during the first quarter of 2016 and inventory soared by roughly 30% on a year-on-year basis. In an April report by Douglas Elliman and Miller Samuel Real Estate Appraiser and Consultants, the average sale price in the area and the nearby Barrier Islands moved 7.5% lower, and the median sale price fell 6.6% from the prior year. The increase in inventory means it takes longer to sell a house with the average number of days on market rising from 53 to 97 year-on-year. Meanwhile, in the high-end market, the top 10% of condos saw values plunge by 14.5% over the period, and inventory rose by 58% equating to roughly a 3 ½ year supply. One of the reasons for the slowdown was a decrease in foreign buyer demand for real estate in the region.


Meanwhile, a March report in Crain’s pointed to signs that New York City’s real estate market has begun to slow after a three-year period of enormous price gains. The article cites many examples of multi-million dollar properties that are either sitting on the market collecting dust or selling at deep discounts to prices seen last year. On May 3, CNBC reported that the luxury home market “may be losing some of its luster.” Demand in the housing market appears to be shifting to lower priced properties.


Meanwhile, there are signs that sales and values in some important cities around the world are slipping. Housing sales in Hong Kong hit a 25-year low in February, and the March figures were not pretty either. Residential home sales are plunging. Resale prices have declined 13% from the peak. Additionally, prices in the tawniest areas of London have declined by close to 12% over the past year.


Low and Mid-Range Home Prices Appear to Have Topped Out

The Case-Shiller 10-City Composite Home Price Index is the most widely followed and respected metric for home prices in the United States.  It measures the change in the value of residential real estate in 10 metropolitan areas of the U.S. As the chart below illustrates, the index has improved from the depths of the recession from 2009-2012 but has been flat lining since August 2015 stuck at around the 197 level.  However, on a year over year basis, it remains up by about 5%.  When the media reports price increases they always quote the year over year figures and everyone thinks prices are still increasing when in fact they are not.  While we might get some slight movement upward in the summer months, by the fall of 2016 the year over year comparisons will begin to look very weak.

pst_Case Shiller 10 City Index graph


Higher interest rates coming at a bad time

High-end real estate around the globe is showing signs of weakness. Low and mid-range home sales remain strong in volume but prices are certainly not increasing by much anymore. Real estate is one of the most interest rate sensitive asset classes, as most real estate is financed with borrowed money.  In the United States, it now seems more likely that another interest rate hike is in the cards for this summer. On an inflation-adjusted basis, the rebound in the housing market in the U.S. and many major cities around the world has been the result of uber-low interest rates. When the rates begin to rise, it is likely that real estate activity will slow and prices will continue to fall in the luxury sector with more moderately priced housing following that trend in the months ahead.


Equity markets and real estate supported by low rates

The decline in high-end housing values could be a sign of another top in the housing market and the global economy in general.  We are now in the eighth year of recovery from the last financial crisis and near the peak of the business cycle.  The stock market has already been signaling a top and for the last year has not been able to take out the highs reached in May of 2015.  The stock market and the housing market are both highly dependent on the level and direction of interest rates.  While both markets are not particularly increasing anymore, if rates begin to move up, they will likely go down.


The Carden Capital Smart Wealth Indices provide an emotion-free view of markets and can dampen volatility when market activity flashes warning signs. These indices may serve as a safe oasis at times when real estate and equity prices signal instability.


While U.S. stock prices have been on the rise since February, the Carden Capital Smart Hedge Index remains in cash since mid-December. There are many moving pieces when it comes to the direction of world markets across all asset classes. Now is a good time to take stock of all of your assets and plan for the future.  Carden will be hosting free webinars on June 7 at 11:00 AM PST and June 8 at 5:00 PM PST, “How to increase your investment returns and reduce risk”. Click on the links to reserve your spot. Alternatively, we will be pleased to send you a recording of the event if you email info@cardencapital.com.


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