Have you been paying attention to the housing market lately? Ever since the value of homes began rising in late 2011, they just haven’t slowed down! In the past few months, I have seen only a hand-full of for sale signs out in the front yard, and they certainly don’t last long. Many of these houses are being sold in 15 days, 11 days, and others in just 2 days! The housing market has certainly picked up steam, and the rising housing prices are an obvious indicator of this.
To be completely transparent, this is awesome news for me as I just so happened to purchase my first home in August, 2011. I mean, take a look at Zillow’s estimate of my home value after I made the purchase (that dollar sign is my purchase, and the solid blue line is my house value).
This chart always makes me smile. I purchased my home in 2011 for $78,000 and it is currently valued at $120,000. That’s an increase of over 15% per year!
But wait…might this mean that there is a housing bubble happening?
As I soon hope to invest in real estate, this is the question that I would like to know the answer to! Of course, no one truly knows when markets will rise and fall, but we can all speculate based on the indicators. So, LET THE SPECULATING BEGIN (said in a manly resounding voice with my finger raised in the air)!!!
As we approach the year 2015, I can’t seem to shake a well-known stock speculation from my head. The book was written by Robert Kiyosaki over 10 years ago, and he predicts that the next huge stock market crash will occur in 2016. That’s just over a year away!
The principles of his speculation make a lot of sense. Basically, the baby boomers (those born in between 1946 and 1964) are starting to retire, and what happens when people retire? They start drawing on their 401(k)’s, which of course means that they are selling shares of stock in order to receive cash for their everyday expenses.
In our basic economics courses, we all learned that when more people are selling than are buying (ie. supply exceeds demand), then the equilibrium price falls, or in this case, the stock price falls. How much will it fall? Nobody knows, but it’s coming.
Large Stock Sales Coupled with an Unstable Economy
When the retirees begin to sell off their shares of stock, there will be a massive outflow of money from the general stock market. Couple this with the large debt-load of the U.S. government and the uncertainty in the economy, and we could soon have a very sticky situation on our hands. The overall economy and stock market might just have one of the largest collapses in history, and it might be coming in 2016.
The Effect on the Housing Market
Yahoo! Finance recently asked the chief economist of Trulia, Jed Kolko, if we should be worried about the state of the housing market, and if another housing bubble is ready to burst. His response: “Not yet.”
According to Kolko and his Trulia team, on a national level homes are still undervalued by about 5%. Only 19 out of the 100 sectors are currently overvalued. This shows us that the price of housing may continue to rise in the upcoming year, but his response, “Not yet” leaves me wondering about his concerns for the future.
With the current rate of increase in the price of homes (such as my house, which is increasing by 15% each year), we may soon be entering a larger ratio of homes that are overvalued in relation to the market as a whole. In addition to this is the dependence that real estate has on the overall economy.
If Robert Kiyosaki is correct in his prediction of the stock market collapse, this will start the domino effect:
- The stock market falls
- Companies become overvalued, which then leads to cost cutting measures
- Jobs get cut
- People can no longer afford to purchase homes
- Supply will outweigh demand in the housing market, which will lead to reduced home values
- This domino effect may repeat many times over before the crisis begins to recover
So Is It Time To Sell or Buy?
Many individuals are wondering if they should sell their homes now, but that question really isn’t valid since most will likely sell their house and then buy another, which nets them a gain of zero since all house values are up. Put in another way, let’s say that I have a 55 gallon drum of gasoline in my garage and the price of gas suddenly jumps from $3.50 a gallon to $10 a gallon, would it makes sense for me to sell my gas and then buy 55 more gallons at $10 per gallon? Not at all! The only reason to sell is if you weren’t going to buy at the higher price. So, in terms of housing, if you don’t plan to buy another home, then sure, go ahead and sell within the next year. But, if you do plan to buy another home, you won’t experience any gain on your transactions.
So is it time to buy a house? This is the question I have been asking myself as I have begun to look for a rental house to purchase. As the prices begin to climb higher and higher, I am starting to grow leery of a home purchase at this time.
But will the home prices actually fall? If we fall into another deep recession like we did in 2009, then there is no doubt in my mind that home values will fall again. When people lose jobs and money is tight, home purchases just don’t happen as frequently, which will cause the housing market to crumble a bit (and perhaps a housing market crash). How much? I imagine that it wouldn’t be as severe as the recent housing market collapse, but it will still be noticeable. With this in mind, I am more likely to stock pile some cash until we get through 2016.
Do you think I should wait to purchase real estate and stock pile cash? Or should I just buy now?