Back in 2005, when the U.S. housing market was on fire, and cab drivers, gardeners and beauticians were flipping houses with abandon, a few housing Cassandras warned that prices were rising too rapidly and the bubble may soon pop. At the time, Federal Reserve chairman Alan Greenspan was blowing helium into the housing balloon like never before, pushing mortgage interest rates to historic lows and housing prices through the roof.
Back then, housing market analysts like Jack McCabe, Bruce Norris, Bill Fleckenstein and few other contrarians were telling the media, without qualification or doubt, that rising prices in Arizona, Florida, Nevada and California were unsustainable and a disaster was eminent.
At the time, most of the housing industry ignored their warnings because they hated what they were saying.
Now McCabe is sounding the alarm again. In an article titled “The Next Real Estate Bubble is Already Underway,” McCabe argues that a “paradigm shift” has occurred in housing. Writing in the Herald-Tribune, McCabe claims that hedge “funds are driving prices higher and artificially escalating values, a trend that in my opinion will continue for the next two to five years.” By 2017, he argues, mortgage interest rates will skyrocket and the hedge funds will dump their inventory in 2016 before the rates rise.
Could McCabe be right?
Prices are rising rapidly again, according to the latest S&P/Case-Shiller Home Price Index. The 20-City Composite was up 12.1 percent in May, compared to a year earlier. Four cities — Atlanta, Las Vegas, Phoenix and San Francisco — posted double-digit growth. In Las Vegas home prices rose 23.3 percent year-over-year. In San Francisco, prices jumped 24.5 percent in 12 months. And Phoenix saw home prices rise 20.6 percent in a year. Twelve MSAs — Atlanta, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, Phoenix, Portland, San Diego, San Francisco, Seattle and Tampa — saw double-digit growth.
While rising home prices are good for the recovering real estate market is the rapid rise in prices sustainable?
The scribes at the Columbia Journalism Review don’t buy into the real estate bubble argument. But the Fourth Estate largely missed the last real estate crash so I would not look to them for real estate advice.
In real estate, timing is everything.
The current real estate recovery isn’t going to last forever, and when it ends, it might come to a halt faster than most observers anticipate.
“There’s money to be made in the next few years,” McCabe writes. “But timing, and knowing when to exit, will be key to developers, lenders and these corporate homeowners. In real estate, when the music stops and you’re left without a chair, you lose … big time.”