In his book “The Signal and the Noise“, Nate Silver (of 538 blog fame) points out that modern society generates a staggering amount of data on a daily basis. Data in itself is not an end, so we sift through it all to find the “signal,” or relevant data used to make predictions about how events may unfold. We then use these predictions to decide the most prudent course of action.
Economic data churns out on a daily basis, and then comes the “analysis.” This is the charts you see on CNBC proclaiming when the next stock selloff will occur, and the home price numbers showing when the “bottom” of the market was reached. All of this data is used for prediction, and prediction turns into analysis about the best way to act.
And when predictions go wrong, a lot of people are held out to dry.
Silver has a chapter that explains the housing bubble, its collapse, and the ensuing economic recession. He asks the question, how did so many people miss such a dangerous possibility? A possibility that was not only missed, but actively supported by all of the ratings agencies, lenders, and financial institutions that blew massive amounts of helium into the balloon in the first place?
This isn’t a book review – although we do recommend the book as sharp, informative, and thought provoking. Rather, we have been reminded about the real estate bubble by several articles on prominent news outlets that offer speculation about a possible “bubble in a bubble” that may be growing.
Home prices continue to rise. The latest report from the National Association of Realtors shows home prices up 11.8 percent year-over-year in March. Existing home sales are also up year-over-year (10.3) percent, but low supply (just 4.7 months when 6.0 is considered healthy) is constraining further growth. With demand up and supply down, prices will continue to face upward pressure as buyers commence with bidding wars.
We wrote last week about the “difficulty with low mortgage rates“, summarizing the idea that low affordability conditions (mortgage rates and home prices) are helping more people qualify for a mortgage, but when conditions deteriorate (mortgage rates rise, home prices up), these borrowers will be priced out of the market.
Since then, we have seen headlines like “Housing Market May be Experiencing a ‘Bubble’ Within a Bust” and “The Next Housing Bubble.” These articles bring up some interesting points about the future of real estate.
But they may be missing the “signal.” Central Coast Lending owner Jason Grote points out that an important difference between the old real estate bubble and the new one is that currently people are qualifying for homes under stringent lending conditions. We are not talking about sub-prime loans here. Another point to consider: as prices rise, more homeowners will come out from underwater and more people will look to sell their homes. The free market will have a chance to settle the supply and demand issue.
We would just like to urge caution for people that are desperate to get the “latest word.” There will be countless data points emerging and plenty of armchair analysis. Be deliberate, learn what you can, and find a trusted person to consult with. This may not be the most satisfying advice, but as we saw in the Boston bombing, the race to report news and analysis first can cause striking inaccuracies.
On the mortgage front, interest rates continue their fall back near record levels. See the April 22 update HERE. The Central Coast Lending Mortgage Rate Tracker will now be publishing updates on Monday, Wednesday, and Friday. Make sure to follow along HERE.