U.S. Home Prices Are 14% Overvalued According To Bank of America

Tyler Durden's picture

There has been an odd shift when it comes to US sentiment toward home ownership: while in the past, the higher home prices rose the greater the demand was for housing (leading ultimately to the housing debt bubble of 2006), this time around we are getting increasingly more frequent indications of just the opposite.

Some have started to notice: as we noted one week ago, in its traditionally cheerful assessment of the US housing market, the NAR's Larry Yun snuck in an unexpected warning:

"Home prices ascending near or above double-digit appreciation aren't healthy – especially considering the fact that household income and wages are barely rising."

He did it again just a few days later:

"The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers."

This is about as close to a warning that the US housing market is back into bubble territory as one can hope to get from the NAR. To be sure, we noted this surprising development one week ago in "For The Average American, Owning A Home Is Increasingly Unaffordable."

Recently MarketWatch came to the same conclusion noting that "there’s a paradox in Monday’s existing-home-sales data. Sales slid 7.1% to the lowest pace since November, the National Association of Realtors said. NAR has warned for many months that low levels of supply, which are pushing prices ever higher, will eventually cripple the market."

February’s decline may be a sign that the Realtors’ fears are coming true, although it may still turn out to be a temporary blip caused by weather, new closing regulations, and the difficulties of adjusting data to account for all those anomalies. Still, as NAR Chief Economist Lawrence Yun said in a statement, “the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”

 

That may sound obvious: if you can’t afford the few limited options available on the market, you’d probably give up too. It also tracks with a survey NAR published last week, which found that the share of current renters who say now is a good time to buy fell in the most recent quarter.

 

But it’s worth remembering, as Yun pointed out in a press conference Monday morning, that it wasn’t too long ago that higher prices drew more buyers in, rather than shutting them out.

It goes on to observe that this phenomenon was documented by Robert Shiller. In a 2007 paper, Shiller described the bubble mentality as “a feedback mechanism operating through public observations of price increases and public expectations of future price increases. The feedback can also be described as a social epidemic, where certain public conceptions and ideas lead to emotional speculative interest in the markets and, therefore, to prices increase.” A few paragraphs later, Shiller wrote, “That the recent speculative boom has generated high expectations for future home price increases is indisputable.”

In other words, a buying scramble driven by manic euphoria to jump on the latest rising-price bandwagon.

But that is no longer the case: "In the February Fannie Mae Home Purchase Sentiment Index, survey respondents said they expect home prices to rise 1.7%. One year ago, respondents forecast prices would rise 2.5%. In the 12 months to February, the actual price gain was 4.4%, NAR said Monday, but in recent months the yearly increase has been as high as 8.2%."

Additionally, homeowners have become less confident about the value of the equity they have in their homes. That means they’re no longer cashing out to finance other spending, as they did in the bubble years. It also means they may not understand how much their homes could command on the market, making them less likely to list and worsening the supply problem.

* * *

But ultimately it all come down to what is the fair value of housing. And according to a Bank of America research report, the recent trends in which ordinary Americans are left behind from the "American Dream" will persist for one simple reason: "home prices are currently overvalued by 14% on the national level."

This is what BofA's chief economist Michelle Meyer says:

In order to gauge the ‘fair value” of home prices, we typically compare prices to the trend in income. The logic is simple – the more income one earns, the more housing he/she can access. However, prices will occasionally diverge from income, as we are experiencing now and clearly did during the early 2000s. As we have been arguing, home prices are currently overvalued - by our estimates 14% on a national level.

 

It is useful to explore the reasons for overvaluation to understand the likelihood of a correction. During the early 2000s, the strong appreciation in home prices reflected the combination of greater availability of credit and unanchored expectations for future home prices. Today, the gain seems to be more a function of the price of credit – in other words, the level of rates. It is not an environment of high leverage in the mortgage market.

 

According to IMF research, this is an important distinction. In recent research under the Global Housing Watch umbrella, IMF economists argue that a distinguishing feature of real estate busts is the “coincidence between the housing boom and the rapid increase in leverage and exposure of households and financial intermediaries.” During this past crisis, of the 23 countries with “twin booms” in real estate and credit, they found that 21 of those countries had a severe downturn in housing and the economy. The 7 countries that just had a housing boom without excess leverage, only 2 went through a systemic crisis.

 

The US is not alone in returning to a housing market where prices appear overvalued. The IMF identifies a number of other major economies with prices in excess of income (Chart 5). The worst offender is New Zealand followed by Germany. Indeed, over the past year, 33 out of the 51 countries in their global housing price index showed an increase in home prices. The IMF’s aggregate for global home prices shows that prices are up 1.7% yoy as of 3Q15, assuming equal weights for countries (Chart 6).

 

Bottom line: lessons have been learned regarding household leverage. However, there has still been an impressive recovery in home prices in many countries.

There is another, simpler explanation: perhaps it is not concerns about future home appreciation, perhaps American incomes are simply not growing anywhere as fast to give them comfort that there will be other greater fools to whom the newly purchased house can be flipped. Couple with the ongoing lack of easy credit for most Americans to fill the purchase price gap, and it becomes very clear why the US housing market continues to be driven higher mostly by all-cash foreign buyers spluring on ultraluxury properties in hopes of parking cash indefinitely now that the Swiss banking model is defunct.

The good news, if only for the Fed, rent inflation will continue to soar in the coming months and years as the best households can hope for is to pay month to month for a roof above their heads, which is troubling because as we noted back in January, "Rental Rates Have Reached Apocalyptic Levels." With the Fed's ongoing easy money policies, rents will only keep rising and soaking up even more of US disposable income. And then the Fed's economists will wonder why spending on non-core items continues to decling with every passing year.

 

 

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OrangeJews's picture
OrangeJews (not verified) Mar 30, 2016 12:29 PM

140%

 

FTFY

Boris Alatovkrap's picture

In other news, Bank of America over value by 1400% judge by ratio of real asset to liability with offset for legal fee.

Ghost of Porky's picture

According to Chinese investors they are priced just right.

Bunga Bunga's picture

Since they are TBTF they are undervalued.

847328_3527's picture

100% or moar overpriced in many locations. The pent up correction [reversion to the mean] will be brutal.

Jethro's picture

Good, I hope it hurts badly enough so that the following generations will not look at real estate as an investment.

j0nx's picture

At least 40% in No. Va. area for sure. We are pretty much at 2006 peak prices now again in many areas here...

Life of Illusion's picture
WHOS BUYING THIS OVERPRICED JUNK ???????????????? https://www.newyorkfed.org/markets/ambs/ambs_schedule.html

Operational Results
In order to ensure the transparency of its agency mortgage-backed securities (MBS) transactions, the Open Market Trading Desk (the Desk) at the New York Fed publishes historical operational results, including information on the transaction prices in individual operations, at the end of each monthly period shown in the table below. Operational results include agency MBS transactions associated with additional asset purchases and reinvestment of principal payments from agency debt and agency MBS in agency MBS, as directed at times by the Federal Open Market Committee (FOMC), as well transactions associated with small value exercises.

Reinvestment Purchase Amounts*
The Desk’s tentative agency MBS purchase amounts associated with the reinvestment of principal payments from agency debt and agency MBS in agency MBS are shown in the table below. 

 

March 11, 2016 – April 12, 2016

The Desk plans to purchase approximately $23 billion in its reinvestment purchase operations over the noted monthly period. The next release of tentative reinvestment purchase amounts in agency MBS will be at 3 p.m. on April 12, 2016.

Operational results for this period will be released at 3 p.m. on April 13, 2016.

February 11, 2016 – March 10, 2016

The Desk plans to purchase approximately $19 billion in its reinvestment purchase operations over the noted monthly period.

Results 

January 14, 2016 – February 10, 2016

The Desk plans to purchase approximately $25 billion in its reinvestment purchase operations over the noted monthly period.

Results 

December 11, 2015 – January 13, 2016

The Desk plans to purchase approximately $21 billion in its reinvestment purchase operations over the noted monthly period.

Results 

November 13, 2015 – December 10, 2015

The Desk plans to purchase approximately $25 billion in its reinvestment purchase operations over the noted monthly period.

 

on and on

see link for ongoing purchases

starman's picture

"Valued"? Overpriced you mean! 

napper's picture

That's over-valuation of Bank of America's share price. 

 

Massive money printing renders real estate purchase a viable alternative (at least in some states) to putting money in stocks or the bank.

 

 

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 30, 2016 12:32 PM

Please let's add inflation - this one according to shadowstats. Not the one we'are being fed from MSM ok? http://independenttrader.org/lies-damned-lies-and-statistics.html 

cowdiddly's picture

Its Property Taxes that are insane over valued. The last remaining homeowners will be milked like Tax Donkeys for every last drop. If your in the market now, RENT.

In this case if you hold it, you STILL don't own it.

booboo's picture

"The last remaining homeowners will be milked like Tax Donkeys for every last drop. If your in the market now, RENT."

Um...my tax increases get passed on to the renter but thanks for the laugh.

Sturm und Drang's picture

Redefining "lowball".

buzzsaw99's picture

In order to gauge the ‘fair value” of home prices, we typically compare prices to the trend in income. The logic is simple – the more income one earns, the more housing he/she can access...

WRONG MOTHER FUCKER! house prices haven't come all this way due to rising wages. house prices are a function of interest rates, and, to a much smaller degree, income.

rejected's picture

and a product of that non existent inflation.

Oh yea, that wonderful central bank and all those Merimexicano's crying for moar inflation, more, moar!

Having my roof redone. In 1995 it cost $2500. In 2016 it's $9000. That my friends is doubling every five years.

Housing in my day... $25-60 thousand. Today $300,000.

Auto's... $3-10 thousand. Today $20-70 thousand.

Idiot Thingies...  $0.25 at a news stand. $700 today.

No Medical Insurance required. You could go get a broken arm fixed,,, $250 cash. Today,,, Insurance for todays unlucky stuck with O-Care. $15 thousand. The broken arm... $5000 and you better have a insurance card, they don't take cash.

Even false Teeth... $250.  Today I was quoted $23 thousand.

Food... $25 weekly. Today $200

And today my earnings are approximately the same as then, maybe 10-15% higher.

Yea, no inflation because my gubbermint told me so.

Well, I'm old and on my way out of here to the nether land. Good luck,,,,,,, suckers!

 

buzzsaw99's picture

Well, I'm old and on my way out of here to the nether land. Good luck,,,,,,, suckers!

 my philosophy exactly.

BKbroiler's picture

@rejected   Great post man

847328_3527's picture

Not only zero interest rates but unlimited money laundering without consequnces. The USA is now the #1 Money Laundering destination of Mainland Chinese, Arabs, Nigerians and Russians.

 

These policies of Bush and Obama have added to the brutal destruction of America's middle class.

taopraxis's picture
taopraxis (not verified) Mar 30, 2016 1:34 PM

Very conservative estimate. There is a *massive* level of hidden supply at prices high enough to allow marginal credits to extricate themselves from their cement-overshoes mortgage obligations. When markets crashed, I asked a local banker where the foreclosures were. I said, "The maps show zero foreclosures. Tell me the banks are not hiding their losses." He just smiled. Quit his job a short time after that, too. Now, over 7 years later, there are dozens of defaults and auctions in my area and this is a relatively solid town. Lower level working class towns around here have been absolutely crushed. It took years...

rejected's picture

Over valued -or- over priced. I think the latter as the junk-McMansions they're building today will never last the 50-100 years of past buildings that were built to serve as homes, not ATM's.

But, hey, they're pretty pieces of shit!

Jethro's picture

So if we go NIRP, then house prices will increase by a multiple of eleventy?

Housing is more like a consumable than an investment. It's the government involvement (and subsequent financial meddling) that made the prices get out of hand in the first place. Require a 20% down payment to get a mortgage, and do away with all the free government handout bullshit and see where prices go.

doggis's picture

OK - SO THESE ARE THE SAME BOILER ROOM "BANKS" THAT ISSUED "LIARS LOANS", AND MISREPRESENTED THESE LOANS TO ABS TO  SELL THEM OFF, AND THEN WITHOUT "TITLE" TRIED TO FORECLOSE ILLEGALLY ON HOMES - MANY OF WHICH HAD NO CLAIM AGAINST THEM - THOSE BANKS?

OH YEAH - THOSE SAME BANKS WHICH HELD BACK ON GENUINE FORECLOSURES TO MANIPULATE THE SUPPLY OF HOMES AVAILABLE TO THE MARKET, SO THEY COULD MANIPULATE PRICES HIGHER AND THUS MARK THEIR BOOKS HIGHER THAN MARKET... YOU MEAN THOSE BANKS...

 

SO HOMES ARE OVERVALUED NOW - HUH???

Farmer Joe in Brooklyn's picture

Challenge.

So it seems income is part of their equation. I'm assuming real income (adjusted for inflation).

If, in fact, that is the case then I would like to see them plug the TRUE inflation rate into their model to get a more accurate real income adjustment.

I'm guessing this would change their 14% to something like 40-50%.

My first and most memorable lesson about modeling (learned working with equity derivatives on a convertible bond desk): "Garbage in, garbage out."

Tick tock, tick tock...

lasvegaspersona's picture

The correct price for assets in a zero or negative rate environment is either INFINITY (or BEYOND!!!). It's a Buzz Lightyear world.

When money is free (and you never have to make principle payments) BUY BUY BUY...house, stocks, gold...just BUY!!!

To Hell In A Handbasket's picture

I'd say at least 55%. Bring on the crash.

 

lasvegaspersona's picture

Zillow sez my house is super wonderful and worth a gazillion bucks...fortunately my bank believes that and gave me a 2.75% re-fi....suckers....

I wonder if I'll ever have to actually pay for my house....maybe I'll re-fi again at 1.75%.....

Dr. Bonzo's picture

Jingle mail, jingle mail, jingle alllll the way....

 

Seasmoke's picture

And yet BOA will continue to fraudclose on homes that they may have given a loan from someone else whose name is/was unbeknownst to the borrower. And BOA never loan. Or held the mortgage or the note. 

 

They must know a tidal wave of defaults ls coming very soon. 

Full Nelson's picture
Full Nelson (not verified) Mar 30, 2016 1:57 PM

Shut up, BOA!  Stop unbagging cats!

EVERY SINGLE municipality is counting on those overvaluations!

Moustache Rides's picture

14%?  Try 60% overvalued.