Will Overvalued US Real Estate Burst Anytime?

January 12
8:50 AM 2016

The US real estate is overvalued and it could be another housing bubble to bring down the US economy, according to some analysts. The American real estate prices soared to peak in the decade. The US real estate is overvalued in the range of 25 percent to 60 percent. There're growing concerns about the repeat 2008 financial crisis again?

Economists caution the run up in student loan debt and latest drop in junk bond prices. Now, they express concerns over a possible collapse in the US housing market again like what happened in subprime mortgage crisis in 2008. Legendary investor George Soros was quoted a few days ago saying the turmoil in China's financial markets reminds him of the crisis in 2008, as reported by The Sunday Times in Sri Lanka. 

Fortune analyses that lending standards eased out a bit, but remain at tighter than it used to be in mid 2000s. According to Housing Analysts Marc Hanson, the housing prices are about 25 percent to 60 percent above what the fundamentals of the US economy can justify. Hanson says that US real estate is dangerously overpriced using simple mortgage math. 

While giving an example on how US housing market is overpriced, Hanson said that the average home price in Bay Area is $1.45 million and average income is $180,000 per annum. Considering insurance costs, credit card payments and car debts, the average affordability for home would be $778,000. This is almost 50 percent below the average price of $1.45 million, explains Hanson.

Hanson said: "The incremental demand is consuming the unorthodox capital." The unorthodox capital is not coming in form of overseas investors pouring funds in the US housing market, but domestic investors as well. Many US consumers are buying second and third homes and serving as landlords. 

Foreign buyers are also giving priority to park their money in the US property market. It's estimated that the US property market mostly in the New York will receive more foreign investment in 2016 than it was in 2015, reports International Business Times. According to a survey by Association of Foreign Investors in Real Estate (Afire), New York beats London, Los Angeles, Berlin and San Francisco in wooing foreign investors into the real estate market.

The US President Barack Obama has recently signed a law that waives taxes on foreign pension funds under the 1980 foreign investment in Real Property Tax Act (FIRPTA). Foreign pension funds are allowed to buy 10 percent of a US publicly traded Real Estate Investment Trust (REIT). 

CNBC reports that Chinese investors bought $8.6 billion worth property in the US commercial real estate in 2015. According to a global real estate services and investment firm CBRE, China ranks second after Canada in the US real estate market investments. The recent changes in law also helping the US market attract more foreign investment.

Jay Farnar, President at Quicken Loans, says products such as Rocket Mortgage are improving the quality of lending. Rocket Mortgage executes more efficient collection of consumer data and it makes underwriting more robust.

According to data from Mortgage Bankers Association, the mortgage originations remained flat during the past two years. Lenders handed over few mortgages these days when compared with those in 2012.  

© 2022 VCPOST, All rights reserved. Do not reproduce without permission.


Join the Conversation

Subscribe to VCpost newsletter

Sign up for our Deals of the Day newsletter.
We will not spam you!

Real Time Analytics