Two Reasons Why Today’s Housing Market Isn’t a Bubble

Two Reasons Why Today’s Housing Market Isn’t a Bubble

The housing market is not quite as bad off as it seems, and there are some good reasons for that. There have been talks of an impending bubble in recent months with many people predicting another crash like the one we saw back when mortgages were easy again (you know what I mean). But if you look at all of this data together then something different becomes clear-the economy may actually benefit from increased demand due to higher prices! The housing market is in a bubble. The recent survey from Pulsenomics asked over one hundred experts and economists if they believe this, with nearly all responding yes! The results indicate most experts don’t think that’s the case (see graph below):

As the graph shows, a strong majority (60%) said the real estate market is not currently in a bubble.  In the same survey, experts give the following reasons why this isn’t like 2008:

  • The recent growth in home prices is because of demographics and low inventory
  • Credit risks are low because underwriting and lending standards are sound

When you’re concerned about a possible crash, here's how to understand the two key factors that should help ease your worries.

1. Low Housing Inventory Is Causing Home Prices To Rise.

This means that the supply of homes available for sale needed to sustain a normal real estate market should be about six months. Anything more than this is an overabundance and will cause prices in your area to depreciate, while anything less can lead you towards higher rates or appreciation based on how long it lasts.

As the graph below shows, there were too many homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble. Today, there’s still a shortage of inventory, which is causing ongoing home price appreciation (see graph below):

home prices are increasing because there's a healthy demand for homeownership and at the same time, a limited supply of homes available. Odeta Kushi, Deputy Chief Economist at First American, explains:

“The fundamentals driving house price growth in the U.S. remain intact. . . . The demand for homes continues to exceed the supply of homes for sale, which is keeping house price growth high.”

2. Mortgage Lending Standards Today Are Nothing Like the Last Time.

It is currently more difficult to get a mortgage than it was during the housing bubble. Here’s a graph showing the mortgage volume issued to purchasers with a credit score of less than 620 during the housing boom, and the subsequent volume in the years after:

This graph helps show one element of why mortgage standards are nothing like they were the last time. Purchasers who acquired a mortgage over the last decade are much more qualified than they were in the years leading up to the crash. notes:

“. . . Lenders are giving mortgages only to the most qualified borrowers.  These buyers are less likely to wind up in foreclosure.”

Bottom Line

Housing prices are increasing in most markets, but many people believe we're living through an epic bubble. The fundamentals of the housing market today don’t compare to 2008 when everyone was talking about real estate on repeat and mortgages went down as far as they could go? connect me if you want some help understanding why this isn't happening anymore

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