Bubble? What Bubble?
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Housing Bubble: Is
There a New One Forming?
Posted: 29 May 2013 04:00 AM
PDT
 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.
1.
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.
2.
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.
3.
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 are currently unfounded.
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