The housing market is recovering so
nicely that it has caused some to wonder whether a new housing bubble is
forming. Today, we want to explain that the fear of a new pricing bubble in
real estate is unwarranted.
Trulia
revealed some great data on this point in a recent blog post. They explained that, even with the
recent price increases, national home prices are still 7 percent undervalued.
Trulia explained:
“Home prices nationally remain
undervalued relative to fundamentals and much lower than in the last bubble.
That’s why today’s price gains are actually still a rebound, not a bubble.”
Prices are below their fundamental
value in the vast majority of the country (91 of the 100 largest metros). Even
in the parts of the country that are now overvalued they come nowhere near the
percentages we saw in 2006-2007. For example, let’s look at the two markets
that are most overvalued today. In Orange County, California prices are
currently overvalued by 9%. In 2006, prices in the region were overvalued by
71%! The second most overvalued market today is Austin, Texas at 5%. Texas real
estate prices did not skyrocket as they did in many other parts of the country
during the last boom. Austin prices were shown as being 12% overvalued at the
time.
Again, prices are still undervalued in
91% of markets and, even in the markets that are overvalued, they are nowhere
near the numbers of the 2006-2007 bubble.
Jed Kolko, Trulia’s Chief
Economist, explained:
“So are we in bubble territory? No.
Bubble-phobes can rest easy. Even with recent sharp home price increases,
prices are still low relative to fundamentals and are far below bubble levels.”
Dr. David Stiff, chief economist
for CoreLogic Case-Shiller agreed in a recently released report
on prices:
“Even if double-digit price
appreciation were to continue in former bubble metro areas, there is no reason
to believe that new home price bubbles are forming. That’s because
single-family homes in these markets are still very affordable, even after last
year’s large price gains.”
Three reasons there
will NOT be another bubble
Prices are determined by the ratio between
supply and demand. Here are three reasons a bubble will be avoided.
- Supply is beginning to increase. A lack of inventory is creating a market of multiple
bids which has caused prices to rise. The National Association of
Realtors (NAR), in their latest Existing Home Sales Report, revealed
that the months’ supply of inventory has increased from 4.3 to 5.2 months
since January.
- Demand will decrease in certain demographics. For an example, investors have been a large part of
the housing market over the last several years. As prices continue to
rise, a certain percentage of these buyers will back off.
- As mortgage rates increase, buyers will be able to
afford less. The Mortgage Bankers
Association, Fannie Mae and NAR have all projected an increase
in mortgage rates over the next year. Buying power will decrease as
borrowers can no longer afford the same price point as monthly payments
will increase.
For these reasons, we believe the fear
of a new housing bubble is currently unfounded.
