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3 Reasons the Housing Market is NOT in a Bubble

3 Reasons the Housing Market is NOT in a Bubble | Keeping Current Matters

With housing prices appreciating at levels that far exceed historical norms, some are fearful that the market is heading for another bubble. To alleviate that fear, we just need to look back at the reasons that caused the bubble ten years ago.

Last decade, demand for housing was artificially propped up because mortgage lending standards were way too lenient. People that were not qualified to purchase were able to obtain a mortgage anyway. Prices began to skyrocket. This increase in demand caused homebuilders in many markets to overbuild.

Eventually, the excess in new construction and the flooding of the market with distressed properties (foreclosures & short sales), caused by the lack of appropriate lending standards, led to the housing crash.

Where we are today…

1. If we look at lending standards based on the Mortgage Credit Availability Index released monthly by the Mortgage Bankers Association, we can see that, though standards have become more reasonable over the last few years, they are nowhere near where they were in the early 2000s.

3 Reasons the Housing Market is NOT in a Bubble | Keeping Current Matters

2. If we look at new construction, we can see that builders are not “over building.” Average annual housing starts in the first quarter of this year were not just below numbers recorded in 2002-2006, they are below starts going all the way back to 1980.

3 Reasons the Housing Market is NOT in a Bubble | Keeping Current Matters

3. If we look at home prices, most homes haven’t even returned to prices seen a decade ago. Trulia just released a report that explained:

“When it comes to the value of individual homes, the U.S. housing market has yet to recover. In fact, just 34.2% of homes nationally have seen their value surpass their pre-recession peak.”

Bottom Line

Mortgage lending standards are appropriate, new construction is below what is necessary and home prices haven’t even recovered. It appears fears of a housing bubble are over-exaggerated.


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3 replies
  1. Ted
    Ted says:

    I believe the person writing this article is forgetting the peak prices of homes before the crash in 2008 were unsustainable. Those over inflated values were not based on real sustainable demand. Another factor is the federal reserve has keep rates at or near zero percent for almost eight years. That has never been done before in the history of the federal reserve! The super low mortgage rates the last 7 years as a lot to do with the increase in home prices! Cheap money from the feds inflate capital assets. I’m not predicting a bubble but we are headed in that direction.

    Reply
  2. John
    John says:

    The housing market is in the same bubble that was blown prior to the pop of 2008. Real estate prices were not driven by subprime; they were driven by 1% interest rates from the Fed. When interest rates were driven as high as 5.25%, the bubble popped. This would have happened with or without subprime.

    When the market bubble popped in 2008 because of the higher 5.25% interest rate, the Fed immediately dropped rates back down, not just to 1%, but to 0% for 8 years! At the same time, government intervened, delaying foreclosures and rewriting mortgages that would have otherwise failed. The actions of the Fed and our government simply reinflated the same bubble.

    When interest rates rise and they are (although rather slowly), the bubble will pop again and we will be in the same place we were in 2008.

    Reply
  3. High Return Real Estate
    High Return Real Estate says:

    I think this is a good post, but I do agree that I lot of information is missing. The fact that the housing market has not yet recovered does not mean that we are not headed in the same direction. I agree with Ted that those demands were not sustainable, but were driven by the low interest rates which were also not sustainable.

    – C

    Reply

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