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Are We Facing Another Housing Market Bubble?

It would be ideal, of course, if we could predict real estate bubbles. Than we could make policies that might stymie their growth or at least avoid buying at high prices. Unfortunately, we can’t, but we can think about the signs that might point to a housing market bubble and educate ourselves on what to watch out for.

1. Over building. For many homeowners, the images from the height of the last housing market bubble are seared into memory; Single homes languishing in neighborhoods built for hundreds. Whole communities with roads and streetlights but no homes. Overbuilding was clearly a problem in the last real estate bubble.

Seven years later, builders are finally building again. Are they overbuilding? By most indications, no.  “Builders need to produce 1.5 million new homes to keep up with growth ─ but they’ve been building only about 500,000 new homes each year for the past six years.” (Source: Are We in Another Housing Bubble?, March 28, 2013) So in fact, builders may be under building, though that can change very quickly.

2. Low interest rates. The debate over whether historically low interest rates in the aftermath of the 2001 recession caused our last real estate bubble remains unsettled, but it’s generally true that low interest rates drive up demand for mortgages which, all else equal, drives up the price of homes. Today, interest rates remain near historic lows, but the Fed has said that as long as the economy continues to improve, it will begin to rollback the stimulus that is keeping interest rates so low. Rising rates, than, are likely to put a damper on demand for mortgages, thereby slowing home price increases.

3. Shadow inventory. There has much debate lately about whether a shadow inventory ─ homes that are not occupied but not on the market for sale ─ actually exists. Recently, former FDIC Chair Sheila Bair said lenders may be sitting on huge numbers of foreclosed houses that have been held back from the market. “As housing prices start to perk up, that hidden inventory may come flooding into the market ─ and push prices back down.”

4. Price changes. Price changes are the trickiest, most potentially confusing, factor to consider when deciding whether we’re headed for a housing bubble. Because on the surface, rapid recent price increases scream, “Yes, we’re in a bubble!” According to national home price data from Case-Shiller, average home prices were up more than 10% in March 2013 over the previous year. That’s more than double the normal average price increase of 3-5%. But it’s important to take into account the fact that we’re recovering from the worst housing crash since the Great Depression, and housing prices are still 28% below their June 2006 peak. (Source: S&P/Case-Shiller U.S. National Home Price Index, 2013)

Bubble? No Bubble?
What Can You Do?

Anyone who bought a home in the last eight years likely feels burned by the last housing bubble. Millions of homeowners bought high, only to see the value of their homes decline substantially and found themselves with a mortgage value higher than the home’s worth. No one wants to go through that again.

If you’re thinking about buying, there’s no way to be certain if the price you decide to pay is an all-time high price or a fair market value. But here are some steps you can take to protect yourself:

  • Take your time. No matter what anyone says, don’t be rushed into making a home-buying decision.
  • Do your research. Analyze price trends in the area you’re considering. How do today’s prices compare to trend? Then look at prices of homes in one area and compare them to prices of similar homes in another area. Are price differences justified (e.g., by better schools, more control location, etc.)?
  • Seek the help of a trusted, professional real estate advisor. Find a real estate advisor who you trust is looking out for your interests, not just looking to make a sale. Asking friends and family for a referral is a good way to find that person.
  • Buy for the long haul. The fact is that even homeowners who bought at the height of the last real estate bubble will probably be fine as long as they planned to live in the home for a while. Buying a home makes the most sense when you plan to be in it for the long haul.

Please call if you’d like to discuss this in more detail.

Copyright © Integrated Concepts 2013. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

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