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Housing Slowdown Is a Good Thing

Housing SlowdownGerri Willis and I discussed housing on Fox Business this week. I have known Gerri for a long time, as she was a housing industry reporter early in her career and even wrote a couple books on housing investment.

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Don't Flip Out: Beware the Risk of Artificial Appreciation


Flipping CoinFlipping is back!  

 Home price appreciation has been so rampant, particularly in California and Florida, that flippers and get-rich-quick scam artists are flourishing again. Just as in the mania of 2004-06, flippers make money when the party is raging, but inevitably, someone loses when the party is busted. We are advising our clients in areas with a high percentage of flippers to take into account the risk of artificial price appreciation.

Will home price appreciation remain strong in the face of modest job growth and the recent uptick in mortgage rates?

Price appreciation is largely driven by the degree to which demand exceeds supply. While the best short-term measure of the housing demand/supply balance is months of supply of homes on the market, the best long-term measure is the ratio of household formations to new home construction. Since household formation data is highly unreliable, we use job growth as the best proxy because there are typically 1.2 jobs per household. Affordability, confidence, and demographic factors determine whether that household rents or buys. We have a great demand model that estimates that demand by price and rent range.

Consider the following: