Market Hot...But Not Frothy

The real estate market has been in overdrive the past several months.  Homes are selling at an incredible pace, especially in the sub $400K price range.  Inventories are hovering around the 3-month range which is brisk compared to years past.

With homes selling so quickly, there have been some echos of 2006 and 2007.  For those of us in the real estate business, this tends to induce uncontrolled twitching and anxiety.  Having lived through the worst real estate depression in a lifetime, many realtors are still stuffing cash in their mattresses and hoarding food.

So, fearing yet another market belly flop, I decided to do a deep dive into the data and see how our market is really faring.  What I found surprised me, soothed my nerves, and inspired some confidence.  Let's take a look at our first chart regarding house prices themselves.

Since the market bottomed out in 2012, prices have crept upward with a notable surge in 2013.  Since then, prices have plateaued.  Prices are about where they were in the major transitional periods of the first quarter of 2007 and again on the way down in mid 2010.  NOTE: The prices in this chart do not reflect an average or median price but reflect an indexed value (from FHFA data) with a starting value of $100,000 in 1979.  

The plateau in house prices is encouraging since it indicates that the market is not frothy and that homes are being sold based on economic fundamentals like income rather than on goofy hybrid mortgage products during the bubble years.

Yet, another tool I use to measure whether the market is overheated or not is a an inflation adjusted index.  This is a powerful tool which exposes some of the unseen things happening in the market.  Theoretically, if house prices are tied to income as they should be, and all incomes increase with inflation, then if we subtract inflation from the mix we should see house prices as a fairly stable value over time with little or not increase.  If we do see an increase, we know that incomes might be increasing in the county faster than inflation.  This would be a good thing because it means the workforce would be changing to higher paying jobs.  Or, it could mean that there are distortions going on in the real estate market itself like during the bubble years...in this case, weird mortgage products mucking up the works.

     The blue line represents the inflation adjusted price of housing in Weber County.  As you can see, there was a big sag in the 1980's. During this time, Utah was an undervalued market.  That corrected in the 1990's which ended in a slightly frothy 1999 with a recession and real estate market dip that followed.  Since that time, you can see that the indexed value of $100,000 has been a fairly stable point for Weber County.  The real estate bubble is obvious as well.  To give some more detail, lets zoom on in the blue line...

If we assume that the natural price in this chart should be around $100,000, then we have to ask ourselves, why isn't it at that price all the time?  In 1999 you can see the overshoot and market froth.  In 2002 the olympics created a brief period of froth.  Then in 2004-2005 the market sunk into a light recession marked by many short sales and foreclosures.  From 2005 to 2008 we experienced a once-in-a-lifetime real estate bubble. In 2011, the market over corrected on the down side providing lots of buying opportunity.  Since then, the market has returned to what appears to be equilibrium at our $100,000 index mark.

So, what is the takeaway from all this econo-babble?

1.  Your house is worth right about what it should be for a healthy economy.
2.  The next real estate market downturn should be fairly benign compared to the last one.
3.  The market is not overheated despite the brisk sales.  Low inventory is the culprit.

If you are considering putting your home up for sale and want to know what it is worth, CONTACT ME, and let's find out its fair market value.  I promise to spare you of all the econo-babble.