The US Housing Market Is Not in a Bubble

GuruFocus.com

- By Nicholas Kitonyi

The U.S. housing market is one of the most lucrative areas to invest in as the country"s economy continues to show great strength among the world"s developed economies. The housing market has been one of the most evident indicators of economic growth, which has prompted a rapid rise in housing prices.

Subsequently, the continuous rise in the U.S. House Price Index has been noticed by foreign investors as they continue to pour money into the market in a bid to capitalize on this growth. And after several years of Chinese dominance in the Canadian housing market, there has been a significant shift toward the rest of North America.


In response, real estate investors, led by legendary investor Warren Buffett (Trades, Portfolio)"s Berkshire Hathaway (BRK-A) (BRK-B), have pounced without hesitation. Berkshire Hathaway"s HomeServices, the second-largest residential brokerage in the U.S., announced in April it had signed a marketing agreement with Chinese property portal Juwai.com that would allow it to syndicate all its franchisees" residential listings to Chinese investors.

Juwai.com boasts about 2 million visitors every month, which HomeServices sees as an opportunity to link Chinese investors with U.S. residential listings.

According to reports, China now accounts for nearly half of foreign house buyers in the U.S., which explains why the company pounced on the deal.

The U.S. House Price Index is currently closing in on levels last reached in the early 2000s, and some have started to wonder whether we could be headed toward another bubble. Over the past couple years, however, the index has barely moved, maintaining a month-to-month price change of less than 1%, as illustrated in the chart below.

Reports indicate a sizeable number of U.S. home buyers are trying to avoid agencies and brokers when looking for a home to buy. This is because these homes are sold at relatively higher prices as compared to those listed on for sale by owner "FSBO" portals, which have various costs and fees waived, thereby making them cheaper.

As such, most brokerages and agencies are now targeting foreign home buyers in a bid to augment sales made to U.S. residents. And Chinese investors appear to have the right appetite for these opportunities.

The U.S. housing market has managed to recover from the 2008 to 2009 financial crisis and is now at pre-crisis levels. The House Price Index hit its highest level since 2005 in 2013, after which it pulled back to pre-2000 levels.

The rebound since then has been gradual without major spikes and should continue on that path even as the Federal Reserve gears up for a couple more rate hikes in 2018.

The seasonally-adjusted price index chart shows the market has assumed a stable trajectory, which should be a call for optimism rather than fear of a potential housing bubble.

Conclusion

While Chinese and other foreign investors continue to pour into the U.S. property market, the House Price Index appears to have taken a stable curve following the pullback experienced in 2014.

The Chinese may have contributed to the meteoric rise in housing prices in Vancouver, but the U.S. is a far bigger market to bend to the will of foreign investors. It is highly unlikely we are in a housing bubble, let alone the potential of it melting to cause a crash.

Disclosure: I have no positions in any stocks mentioned in this article.

This article first appeared on GuruFocus.