Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Is a New Housing Bubble Looming on the Horizon?

Written by Paul Esajian

A distinct lack of inventory has recently caused home prices to soar in parts of the country. The fewer options made available have generated bidding wars on properties, as potential buyers are forced to compete over the existing lots. May provided little slack, as housing prices continued their upward trend. Of particular concern, however, are speculations that this momentum may result in a new housing bubble. Analysts fear that the market may be susceptible to another downturn unless the high prices are met with significant increases in new home starts.

“The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth,” said Lawrence Yun, the chief economist for the National Association of Realtors (NAR). Accordingly, Yun suggests that a 50 percent increase in home building would be sufficient in reducing the risk of another bubble.

Statistics released by the NAR have acknowledged a modest jump in house prices from last month. On average, homes increased 8 percent from the previous month to $208,000. However, a month-to-month variation such as this must not be viewed as uncommon. Home prices often fluctuate between months of the year. Perhaps even more concerning, is the 15 percent increase we have seen in the year-to-year price swing. Prices have reached levels that have not been seen since the summer of 2008, right before the bubble burst.

Last month marked the 15th straight month of annual price increases, the first time that happened since May 2006.

While higher home prices are likely the result of several economic factors, analysts have attributed the change to a drop in foreclosure rates. Distressed properties only accounted for approximately 18 percent of home sales in May. By comparison, distressed properties represented 25 percent of home sales one year ago.

Despite a drop in distressed sales, overall sales increased 4 percent from April and 13 percent from this time a year ago. As a result, the annual rate in which homes were sold reached 5.18 million.

While the threat of a new housing bubble remains possible, it is important to familiarize yourself with the differences between this year and the previous financial crisis. According to Gary Thomas, the Realtors’ president, “the boom period was marked by easy credit and overbuilding, but today we have tight mortgage credit and widespread shortages of homes for sale.”

Potential buyers are being lured back into the market as mortgage rates continue to hover near record lows. As a result, buyers are flooding the market faster than inventory levels can accommodate their presence. Buyer traffic is 29 percent above a year ago, but the supply of homes for sale is actually down 10 percent. The lack of housing has resulted in bidding wars, requiring buyers to spend more money in a shorter period of time. The average time for a house on today’s market is approximately 41 days. That is a whole month faster than this time a year ago.

While the threat of a new housing bubble is something to consider, we must understand that recent price increases are the direct result of low inventory levels, not irresponsible loan practices.