Find Your Home In Reno

Dispelling the Real Estate Bubble Myth

With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Reno-Sparks metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.

Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. But this ratio is a misleading measure in assessing bubble prospects. A more relevant measure is the mortgage servicing cost relative to income. This ratio is only minimally higher than the local historical average. It implies no widespread financial overstretching to purchase a home in the region. Furthermore, the nationwide supply of homes on the market relative to home sales is very lean, suggesting similarly tight market conditions in the local area.

Consider the Following Facts:

• The current price of $357,400 is about 70% above the national average.
• The median home price rose 20% in 2004 and 96% in the past three years.
• Home prices were sluggish for most of the 1990s. So part of the recent increase is attributable to the “catch-up” effect.
• The job market has steadily improved after a brief downturn in 2002. There have been 9,400 payroll job additions in the past 12 months to July. Many new job holders seek their own housing units.
• The region added only 26,000 new housing units of which 22,000 were single-family units in the past five years.
• The ratio of five-year job gains to five-year new home construction shows the "hangover" impact of the housing shortage, or housing surplus. In our case, the local market is fairly neutral as the ratio is essentially one. With recent job gains and the expected continued economic expansion, the jobs-to-new home ratio will steadily increase.
• The region attracts a sizable number of retirees and second home buyers. Also having no state income tax helps with net migration.

Summary

• Most credible forecasts predict the region will create at least 10,000 jobs over the next 24 months and mortgage rates will hover around 7% by the end of 2006, which bodes well for future price gains.
• The local market is more likely to appreciate at an above-normal rate because of the strong job growth and from being next to the pricey California market.
• Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, the OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s.

And of course, there are immense tax benefits to owning a home. For example, the 1998 law permitting primary owner occupants to trade down without having tax consequences. Also most home sales results in no capital gains tax. In addition, long-term capital gains tax rates were reduced in 2003, thereby providing higher return for home investors. These positive benefits, if accounted for in the analysis, would have shown an even stronger case for housing fundamentals in supporting home prices.

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All Contents © Copyright 2006, Barb Tuttle and Bill Nock