If you were personally affected by the housing market crash in 2006 to 2008, you are constantly keeping watch on real estate trends. When home prices begin to go up, it’s no wonder you are automatically suspicious. And with the rise in home values over the last few years, you aren’t alone in your concern. Many finance experts feel similarly – they are starting to feel nervous about where the latest home price increase will take us and when it will stop.
What is a Housing Bubble?
A housing bubble describes the increase in home prices due to factors such as high demand and speculation. When the prices get too high, high enough where consumers can no longer afford the cost, or the economy experiences a downturn, the bubble bursts. Houses drop drastically in value and depending on the severity, it can take many years for the market to fully rebound.
Is the Current Market Showing Signs of a Housing Bubble?
Yes, home prices are going up, but maybe not as drastically as some may think. All real estate prices are normally tied to industry growth at a local level. For instance, while homes are selling quickly, at above asking prices, in metropolitan areas like San Francisco and Boston, other areas see normal to stagnant movement of real estate. While home prices quickly jumped from 2013 to 2014 and continue to rise in 2015, the rate has slowed. Part of the increase in home value is due to builder caution against creating new inventory. While you may believe individuals were burned the most when the 2006 bubble burst, you would be mistaken – many builders took the brunt of the hit as well. In 2014, 1 million new homes hit the market, but only 700,000 were single family homes. In a healthy real estate market, 1.6 million homes are for sale, with single-family homes clocking in at over 1 million.
It’s clear the price increases can be mostly tied to a lack of inventory, most likely stemming from builder and current homeowner caution. In many cases, builders simply do not want to take on the same amount of risk again. For homeowners, they are most likely trying to regain the lost equity from 2006 and may still be underwater on their mortgages. For a real estate market to flourish, homeowners have to be willing to pack up and move and lately, that has not been the case.
So while many experts point to the rising prices as indications of a bubble, it’s most likely due to the continued aftershocks of the 2006 downturn. Lenders are not providing loans to anyone who applies – strict standards still apply to all applicants. As confidence in the economy grows, more and more homeowners may be willing to list their homes, providing a greater range of inventory and creating a steadier flow of sales and the home price inflation will steady. So if you’re thinking about buying or selling, be cautious, but don’t change your mind due to distant threats of a housing bubble approaching – it is most likely not the case and a repeat of 9 nine years ago has a low chance of occurring.