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Half Gone, One More Half To Go!

Today is July 1. The beginning of a new beginning. Welcome to the second half of 2015. What’s in store for the next six months? New ballgame or more of the same? What about something in between?

More often than not, the difference between the two halves of the year is far more significant than a year-over-year comparison. This year should not be an exception. Where are we today in relation to where we thought we would be? How does it look going forward? Stay tuned.

Many were the economists and the professionals (including myself) who predicted a fine/robust/healthy year in 2015, with roughly the same level of activity as in 2014 in terms of sales & listings units and a moderate price appreciation. The year is not over, but it is clear that so far, in several steamy markets around the country, prices have escalated more than the 5% forecasted across the 50 States. Overall, home prices are up about 8% y/y.

We are all acutely aware of the reason: the persistent lack of listings. Typical supply & demand tango. Too many people fighting over too few properties. Something had to stretch. Prices did. Since we are still experiencing the same imbalance, it would be logical to assume that the same causes will produce the same effects during the balance of the year.

With this persistent listings drought, combined with the fact that the economy is showing good forward momentum, that new all-time records were reached this first semester for the troika Dow/S&P 500 & Nasdaq, and that unemployment stands under 5.5% (it was 10% in 2009)…. some fear that we are we getting close to a price bubble. Alarmists go as far as suggesting that the real estate market is overheating. Deja-vu from 2000 or 2005? I don’t buy such scenario.

First, let’s recognize that the US is made of many different markets, all moving at their own speed, and not necessarily in the same direction. For all the regions which are affected by what some observers may see as a wild price appreciation, there are many which have yet to be touched by the economic recovery. As an example, much of the average price hike is due to the dynamism of the high-end market this year, yet, most areas in the US are not concerned with the activity at the luxury price level.

But there is more to say to discredit the notion that we are at a dangerous turning point, just like we were in the “bubble days” of 2005. What we saw then, in terms of stats & trends, showed a very different picture from what we are experiencing today. Some numbers, collected in early June & analyzed by Lawrence Yun, the chief economist for the National Association of Realtors (NAR), tell the story. Take a look.

Over the last 12 months, we put 5.3M sales of existing homes on the books, a rather modest performance compared to the 7.2M of 05. Same result in the new-home sales column: 0.6M vs. 1.3M in 05 (nearly twice as many). No proof of the market going crazy here. If you look at housing stats to understand the trends, the comparison is just as graphic: 1.1M for this period vs. 2.1M ten years ago (at a time when the US population was actually 10% smaller).
If you also integrate the facts that, today….
The economy is good but still sluggish nonetheless
Inflation is not a factor
A strong dollar and low energy prices are short term cooling factors
Credit is now as tight as it was loose in 2005
The Fed will finally resolve to push rates a bit higher before year-end
Investors are largely gone. No more good deals, except in depressed markets (but they are depressed for a reason…).
IPOs, particularly in the tech field, are down about 2/3rd from Q1&Q2 2014 (although funding is actually up).
…..At the end of the day, this does not look like an overheating marketplace. It just looks like a market suffering from an atrophied listing inventory. That’s all. Let’s not make too much of it.

The signs mentioned above only suggest that the market is cooling a bit, which, surprisingly is the best news I have for you today. Activity, as we enter the traditional summer holiday season, is still healthy and real estate prices are still rising but at a reasonable pace. The market is taking a breather after a long sprint. More balance & sanity are in the cards. Multiple offers in the median price range will still be the norm in coveted zip codes, but there will be less of them.

Don’t squander this window of opportunity to make your move. Waiting is rarely a good idea. Deciding to forget about buying altogether is an even worse idea: the cost of not buying is more punishing than the cost of buying.

Alain Pinel

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