The short answer is no, not yet, that is.
One of the fundamental principles of real estate is that all real estate is local however, back in 2005 / 2006, before the collapse of the last real estate bubble, analyst painted real estate with broad strokes when it came to price predictions and appraisals. More to my point, we don’t say, Nashville is a HOT real estate market like we did in 2005 / 2006 but, instead we say Germantown in Nashville is a HOT market. In other words, real estate markets can’t be spoken to by simply categorizing whole cities as hot or not. We can’t do that because; the market hasn’t completely recovered from the collapse. The good news is, some areas of the Nashville real estate market have recovered and are even thriving.
I like to call this phenomenon the Micro Market. To help me determine if a micro market is seeing an artificial jump in prices, I look at the immediate local development of the area. Now, when I say immediate area, I literally mean, the area walking distance from the subject property. If I can’t walk to the development from the subject property, I don’t consider that development in the cause and effect for increased prices. So, if I see a jump in prices but, I don’t see any significant development to warrant the jump, it throws up a huge red flag for a possible artificial bubble.
Once I have determined a price increase may be the result of an artificial bubble, I go looking for the cause of the bubble. This isn’t very easy and it requires me to really know the micro market. I am looking for things like, unemployment rates amongst local inhabitants, job opportunities, income levels, local government spending or investments, number of NBS (Non-Bank Servicer) REO’s, number of short sales, presence of flippers, long term rentals or new construction, walk in equity or the lack thereof, and a few other things as well. I take all this information in and pinpoint the cause of the bubble or, in some cases, realize no artificial bubble exist, prices are naturally on the rise.
As concerned as we should be about bubbles in real estate markets, we really should be looking very closely at the artificial restricting of the housing inventories. The biggest factor in creating local or micro market bubbles is the presence of artificial housing inventory restrictions. This happens when you have high long term unemployment in a local area but, you don’t see a correlation in REOs and Short Sales. What has happened is Servicers are keeping people in homes longer by offering “save my home” strategies to them that ultimately prevent the foreclosure. Sure, the foreclosure will happen, regardeless of the intent, the homeowners don’t have an income, are unemployed and regardless of how long the bank plays the “save my home” game, it will ultimately foreclose. The banks are doing this, holding inventory off the market artificially, in order to raise local prices so that they may put their inventories on the market when they aren’t so upside down in the asset. It’s a loss mitigation technique to save the bank from taking catastrophic losses however, it creates turbulent peeks and valleys in prices for traditional buyers and sellers. Granted, in a normal market, having one bank with only about 1-5% of all loans in a particular micro market utilizing this technique wouldn’t really hurt anyone however, having 10-15 banks which represent 20-50% of micro market loans, then you get the potential of a few players being able to artificially control prices outside of the established free market. This is scary.
The ultimate lesson here is, now more than ever, buyers and sellers need to be working with experienced, knowledgeable agents who can understand micro markets, the significance of NBS and how unemployment rates, government investments, qualified buyers and investors have in the market otherwise, buyers and sellers could be left holding an asset with no value or even worse, negative equity.
