During the housing bubble in 2003 – 2005, I had a funny feeling housing wasn’t very stable. It’s not that I’m a financial or housing wizard, it was just that prices were ballooning out of proportion in my neighborhood, especially when you compared it to the average salary. I couldn’t understand how someone who made $54,000 annually could afford a $620,000 house. Now we know that they couldn’t.

However, a funny thing is happening again in the housing market in my neighborhood; houses are jumping in price by 30% or more. Now, it’s not like housing ever really “bottomed” out here – housing prices did dip a bit, about 15-20%, but they were still very expensive compared to the rest of the nation. Instead, what appears to be happening, is the best deals and prices are being purchased by investors and the remainder of the inventory is in limbo leaving a very small available inventory to choose from for potential buyers.

Now, I can’t exactly tell you how I know there are a lot of houses in limbo, I have a trusted source in D.C. who has made it very clear that there’s a huge “shadow” inventory that banks are not releasing. It seems again that banks are manipulating the market by not releasing these foreclosures to potential buyers.

Crystal ball, what do I see?

Based on what I am seeing, what I know, and how the market is soaring in my own neighborhood, I predict an increase remaining throughout 2013 and then come second or third quarter 2014, another dip in prices to better reflect the “real” prices of the market. By the end of 2014, I’m guessing the market will finally stabilize and prices will remain flat for a while, especially if interest rates continue to inch up.

I could be wrong about the time frame, but I’m sure there will be another decrease in prices soon enough followed by a leveling out of prices.

Don’t see what I’m seeing? Let me give you an example:

The circled townhouse below is identical to a townhouse that sold in March of this year for $265,500 to an investor. The investor then flipped the house 2 weeks later and listed it for $359,000. Now, the listing was removed and the unit was not resold. However, the circled unit below is across the way and is listed for $459,000. I don’t think this unit will sell for the price listed since similar units are not selling for this price, yet this is what some realtors think they can get and gives you an indication of the overall feeling about real estate in my area. INFLATED!

Check out the prices in my neighborhood - inflated, right?
Check out the prices in my neighborhood – inflated, right?

You might also notice that prices in my neighborhood are high (which is why I rent in this neighborhood). The lowest price listed here is under $300K (behind the yellow circle) but it’s a small condo. The remaining prices (above $500K) are modest homes in an equally modest neighborhood, but you can’t find anything under $549,000 for a house.

Using Michael Bluejay’s mortgage calculator if I purchased a $550,000 house at 3.75% (being realistic), buying is more profitable after year 11. But my monthly payment with everything factored in would be over $4,000 a month! Ouch. According to his “how much home can I afford” calculator, I can only afford a $349,000 house based on my data. Obviously, I’m out of luck, at least in the neighborhood I currently live in which means I must wait and see if my prediction is accurate.

What are the real estate trends in your neighborhood?

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10 Comments

  1. Wow, that’s crazy. My friend in the Bay Area just purchased a house for $975k. That’s nuts!!!
    California housing market is ridiculous….

    • @Midlife – Coastal California is very expensive – it doesn’t seem to matter if you live in the north or south or inland a few miles, anything 35-miles within coastline is crazy. Of course, once you move 35-miles away from the coast, you hit the inland region and it’s just not quite the same. 😉

  2. Paul @ The Frugal Toad Reply

    One word: Speculation! We are seeing the same thing in Phoenix where speculators are buying short-sale and foreclosure properties and flipping them. Where inventory of homes is tight you will continue to see speculators taking advantage of market conditions. Unchecked speculation devastated the housing market and the general economy in Phoenix. It’s a little like musical chairs except most of these speculators are LLCs and have limited exposure while the the homeowner is forced to pay inflated prices and has to deal with massive loss of equity when speculators move on to the next market! There are many negative effects of this speculation, one being higher interest rates for the buyer of the flipped home. I bought a home from a Canadian LLC that flipped the property and because they did not hold title for more than 90 days I could not qualify for the lowest APR on a mortgage even though I had excellent credit.

    • @Paul – It’s funny you mention Phoenix. Mr. LH and I started to think we should buy property in that area and rent it out (we have family there that could check on it periodically). But when we realized that the rent wouldn’t pay for the mortgage, we started to reconsider. Still something we’re toying with, but we need to do more homework.

  3. Greg @ Thriftgenuity.com Reply

    I haven’t seen any crazy spikes just yet in my area. I expect that once interest rates rise, there will at least be a lull. In fact, I am counting on it, as I want prices to remain low for a few more years while I pick up some rental property. If my area was going up like you say it is around DC, like you, I would be pretty suspect of the sustainability.

    • @Greg – It just looks very similar to the 2002-2005 spike in housing. I know salaries haven’t increased that much in 12-months, so I’m just not sure what’s going on with the housing except investors are scooping the available inventory up while banks are holding on to the remaining properties.

  4. @Pamela – I think I could qualify for a first-time buyer program or teacher program. We haven’t done much research because we feel we’re a little priced out of the market now. I think we’ll wait until next summer (when we’re more financially stable) and see what housing prices are doing here. We’ve also thought about buying property in a less expensive state and renting it out – just to own something!

    • One reason not to wait–some programs take a while to implement.

      For example, in my state (NY), we have a savings program that matches a home buyer’s savings 4 to 1 if they deposit $188 a month into a savings account. But they have to do it over 10 months. So it pays to explore early.

      Even if you decide to buy out of state, a nonprofit in CA might put you on to things that will help you anywhere.

      Good luck.

  5. These are great observations. I wondered about my own house, since I was thinking whether I could sell it and buy something larger, but I think I am still under water. Your article makes me to check the prices, maybe I can afford selling it already.

    I can’t believe people are getting greedy again. Looks like a never ending circle.

    • @Martin – I would definitely look into what prices are looking like in your area. They may pleasantly surprise you. Seems there’s a small inventory and a much larger pool of buyers. Good luck!

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