As home prices continue to soar this spring, many experts begin to wonder if we are in the midst of a new housing bubble. After much discussion and careful consideration of every recent metric, it’s been decided that while home prices continue to rise, we are not in a housing bubble. So what is causing this rapid increase of home prices? According to the National Association of Realtors, it is just something that happens when demand increases faster than supply, as existing home sales were up only 9% over last year. While inventory is increasing, the increase is not happening fast enough to keep up with demand. Thus, resulting in a highly competitive market with a tight supply.
After looking at every quarter since 1988, experts noticed a pattern. When supply was under five months, home prices rose on average by 8%. In contrast, prices only rose 4% when the supply was in the equilibrium range. Experts predict that it will take approximately six to seven months for the market to reach the equilibrium range.
Very similar to the data experts noticed during the peak years of the 2003-2005 housing bubble, the current trend is of supply versus price appreciation. However, there are major discrepancies between then and now, which have led experts to believe these prices should stick.
During the 2003-2005 housing bubble, prices and sales rose to historical levels due in part to rapid expansion in mortgage financing. This is not the case now. While home prices did increase by 7% and 12% in 2012 and 2013 respectively, this was due to an effort made by the market to correct the severe price declines during the recession. Factoring in this one-time bounce from overcorrection, median prices have grown less than 8% on a compounded annual basis over the past 3 years. This is a much smaller increase than the 10% growth seen between 2002 and 2005. Taking inflation into account, this places our current market 30% below the peak set in 2005.
By the end of the 2005 bubble, vacancy rates were extremely high, due to the prevalence of flipping activity and over leveraged speculative investing. This is no longer the case, in fact, vacancies have slowly receded back to more sustainable levels.
As the economy continues to recover and more first-time home buyers are entering the market, home prices are expected to rise. Experts predict the continuation of rising home prices will encourage many homeowners to list their homes, and builders to begin construction on new housing projects…therefore, providing a solution to the problem of supply.