Housing prices continue to skyrocket in Stockton, posting huge year-over-year increases. Inventory is running low, pushing prices even higher. The quick pace of our sudden recovery has been a boon to underwater homeowners and even the city which is now projecting higher than expected revenues thanks to a surge in property values. It seems like we are finally out of the doldrums of the housing market crash that devastated countless families and brought Stockton into bankruptcy, but is our meteoric rise in housing prices too good to be true?
One prominent economist thinks the answer may be yes, especially in areas like Stockton where investors are fueling price increases. Dean Baker, co-director of the Center for Economic and Policy Research, believes that the recent surge is creating a brand-new housing bubble in already hard-hit cities.
“While house prices nationally may not be out of line with fundamentals, there are serious grounds for concern in many local markets,” says Baker in an article penned a little over a week ago. “House prices have been rising at an extraordinary pace in many markets and may soon be hitting levels that are clearly unsustainable. The fastest rate of price increases can be found in many of the former bubble markets. Cities like Phoenix, Arizona and Las Vegas, Nevada are seeing very rapid rates of price increase, as are many of the cities of central valley in California.”
Baker specifically calls out the Central Valley, noting that our dramatic rise in prices is driven in large part by hedge funds scooping up properties in bulk. As SCL uncovered in April, the housing market in Stockton is dominated by investors. These cash buyers, usually from out of town, present problems for regular home buyers who may be caught owning an overvalued property, bringing them underwater if prices suddenly decrease—sound familiar?
Moreover, Baker indicates that the most pronounced price increases are taking place at the lower end of the market.
“In Phoenix…prices for homes in the bottom third of the market rose by just under 40 percent over the last year and have risen at just under a 50 percent annual rate over the last three months. Many neighborhoods in cities like Modesto or Vallejo are experiencing the same sort of run-ups in price.”
In SCL’s analysis, it turned out that investors were indeed the most active on properties selling for less than $100,000, making up nearly three-quarters of the market. A run on these lower-end properties does not bode well for lower-income areas. Baker feels that while current prices have recovered enough to reflect historic levels, the current rate of price increases is unsustainable and can have severe consequences should we continue at a break-neck pace
“If a market is properly priced today, but follows the same path as the bottom tier of the Phoenix market and rises 50 percent over the next year, then it will be seriously over-valued in another year. Even worse, if one of these markets were to sustain the 70 percent rate of increase recently seen in the bottom tier of the Las Vegas market over the next year, then we could be looking at a market that is 70 percent over-valued.”
In addition to inflating housing prices, high investor activity has detrimental effects on the community as a whole. A neighborhood with fewer owner-occupants generally leads to less civic participation and higher instances of violent and property crime. I hope Baker is wrong and our recent turnaround does not cause the city more economic strife. But market patterns indicate that our recovery is being artificially inflated by investors.