Why We Are Not Heading Toward A Housing Bubble

4 Reasons Why We Are Not Heading Toward Another Housing Bubble

With home prices continuing to appreciate above historic levels, some are concerned that we may be heading for another housing ‘boom & bust.’ It is important to remember, however, that today’s market is quite different than the housing bubble market of twelve years ago.

Here are four key metrics that will explain why we are not heading toward a housing bubble:

  1. Home Prices
  2. Mortgage Standards
  3. Foreclosure Rates
  4. Housing Affordability

1. HOME PRICES

There is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone.

Last week, CoreLogic reported that,

“The inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with $213,400 in March 2018.” (This is the latest data available.)

2. MORTGAGE STANDARDS

Many are concerned that lending institutions are again easing standards to a level that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash.

The Urban Institute’s Housing Finance Policy Center issues a monthly index which,

“…measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”

Their July Housing Credit Availability Index revealed:

“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

3. FORECLOSURE RATES

A major cause of the housing crash last decade was the number of foreclosures that hit the market. They not only increased the supply of homes for sale but were also being sold at 20-50% discounts. Foreclosures helped drive down all home values.

Today, foreclosure numbers are lower than they were before the housing boom. Here are the number of consumers with new foreclosures according to the Federal Reserve’s most recent Household Debt and Credit Report:

  • 2003: 203,320 (earliest reported numbers)
  • 2009: 566,180 (at the valley of the crash)
  • Today: 76,480

Foreclosures today are less than 40% of what they were in 2003.

4. HOUSING AFFORDABILITY

Contrary to many headlines, home affordability is better now than it was prior to the last housing boom. In the same article referenced in #1, CoreLogic revealed that in the vast majority of markets, “the inflation-adjusted, principal-and-interest mortgage payments that homebuyers have committed to this year remain much lower than their pre-crisis peaks.”

They went on to explain:

“The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018.”

The “price” of a home may be higher, but the “cost” is still below historic norms.

Bottom Line

After using these four key housing metrics to compare today to last decade, we can see that the current market is not anything like that housing bubble market.

 

Related article: This Month In Real Estate: June 2018

Signs are pointing to a new Housing Bubble… will it really happen again, and when?

A recent report by CoreLogic revealed that U.S. home values appreciated by more than 37% over the last five years. Some are concerned that this is evidence we may be on the verge of another housing “boom & bust” like the one we experienced from 2006-2008.

Recently, several housing experts weighed in on the subject to alleviate these fears.

Sean Becketti, Freddie Mac Chief Economist

 “The evidence indicates there currently is no house price bubble in the U.S., despite the rapid increase of house prices over the last five years.”

Edward Golding, a Senior Fellow at the Urban Institute’s Housing Finance Policy Center

 “There is not likely to be a national bubble in the way that we saw the first decade of the century.”

Christopher Thornberg, Partner at Beacon Economics

 “There is no direct or indirect sign of any kind of bubble.”

Bill McBride, Calculated Risk

 “I wouldn’t call house prices a bubble.”

David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices

 “Housing is not repeating the bubble period of 2000-2006.”

A recent article by Teo Nicolais, a real estate entrepreneur who teaches courses on real estate principles, markets, and finance at Harvard Extension School concluded that the next housing bubble may not occur until 2024.

The articleHow to Use Real Estate Trends to Predict the Next Housing Bubble, looks at previous peaks in real estate values going all the way back to 1818. Nicolais uses the research of several economists. The article details the four phases of a real estate cycle and what defines each phase.

Nicolais concluded his article by saying:

“Those who study the financial crisis of 2008 will (we hope) always be weary of the next major crash. If George, Harrison, and Foldvary are right, however, that won’t happen until after the next peak around 2024. 

Between now and then, aside from the occasional slow down and inevitable market hiccups, the real estate industry is likely to enjoy a long period of expansion.”

Bottom Line

The reason for the price appreciation we are seeing is an imbalance between supply and demand for housing. This has created a natural increase in values, not a bubble in prices.