Clearly there is a major market shift going on.  The question is, how long will we see this hyperactivity, multiple offers and rising prices?  I want to share with you a few of my thoughts.

Normally real estate is cyclical.  Of course other geographical areas have specific issues to their areas, but for the most part we are finally crawling out of a rather severe down-spell.  Owner occupants finally realize that the market has hit bottom, and interest rates are extremely low.  Hedge funds have pooled their monies and are buying up real estate to enjoy monthly earnings, and hoping for appreciation.  I don’t know how much of this price increase is due to hedge funds or individual owners but here are 2 scenarios to the housing rebound I feel are worthy of mentioning.

In the interest of Business 101, there are several issues that determine the price of a product: supply, demand, and elasticity.  As supply exceeds demand, prices reduce.  As demand exceeds supply, prices increase.  In a situation when there are multiple offers for a livable house, the prices will naturally increase.  We are seeing this in California, Miami, and Austin, TX, among other places.

The real question is: how much of this demand comes from owner-occupants?  What percentage of owner occupants can really qualify for a low-interest mortgage?  Not many, I say.  Therefore the owner-occupant demand shall subside in time.

So let’s look at the hedge funds, the institutional investors.  At what point will these businesses decide to stop bidding against each other for the same properties?  The people that run these funds are not dumb.  They network, they look at graphs and statistics, and even though it may not be legal, I suspect they will gravitate to the areas that are less competitive, out of professional courtesy.  They will diversify their own funds into other instruments, such as oil and gas, green technologies and other promising technologies.

Where does that leave the housing market?  Well, that depends on the financial world.  Will these tight restrictions for owner-occupants loosen any?   I don’t think so.  Unless a new freedie or fannie comes on the scene (hint hint hedge funds).

Back to the theory of supply and demand, I believe the hedge funds will diversify soon, the qualified owner-occupants will have bought all the houses they want, and we will see a dip in the prices in the hyper markets.  (Austin is the exception due to its continued population growth.)

Remember Warren Buffet saying, “Be fearful when others are greedy. Be greedy when others are fearful.”  My recommendation is if you chose to buy in these hypermarkets, really study the area and make sure you are not part of the frenzy, but know there is a solid demand for housing in the future.

I’m no economist, so take this free advice as it is: free.  What are your thoughts?