Real Estate Market Bubble… Again?

 Real Estate Markets In Bubble Territory… Again?
Real Estate Market BubbleIn 2006, the U.S. experienced a Real Estate Market Bubble with unimaginable consequences. Homeowner incentives led to overbuilding and too many people were willing to pay skyhigh prices for them with the help of liberal (and at times, fraudulent) mortgages. Home prices today are about 1 percent off of that 2006  peak.

When the housing market collapsed, many lost their primary savings asset, their homes. Home prices sank for years, finally stabilizing in 2012. Today,  the average national home price is at $275,000, which is  just .05 percent of a record high.

Is today’s Real Estate environment any different?

The difference from a decade ago today is that these skyrocketing prices are not being driven by very liberal mortgages that most can’t afford. They are being driven by a lack of homes for sale, as well as record low interest rates. Big difference but a bubble nonetheless. The percent of income required to buy the average house today is 20 percent while in 2006 it was 35 percent. Rates are low, and that makes an important impact on affordability.

The problem is if interest rates start to move up, affordability would decrease. Also, low rates may make homes affordable, but an important number of potential buyers would still not qualify for those low rates or be able to come up with the down payments.

Home equity is also pushing prices higher.

Today, homeowners  have considerably more equity in their homes, roughly 45%,  than they did in the 2006 housing bubble, when they had roughly 25 %. That allows more room for prices to come down and for homeowners to still stay above the red line.

Rental demand is up across the board but primarily for single-family homes, is strong and serves as an income stream for investors. As younger folks age into their home buying years, more than ever before they are choosing to rent, because they either don’t meet mortgage underwriting requirements or are unable to save for a down payment because rents sky-high.

Where do we go from here?

All these factors, unique to today’s housing market, continue to put upward pressure on home prices. Among the nation’s 40 largest cities, 14 have already seen home prices reach new highs. They include, Boston, MA, Charlotte, NC, Austin, TX, Dallas, Portland, Oregon, San Francisco Seattle, Denver and Pittsburgh .  A notable exception was San Jose, California, which boasts some of the highest home prices in the nation, did fall off its highs and absurd price increases in San Francisco are decreasing.

These factors indicate a national real estate market that is much healthier but one that is still prone to major downside consequences. While the outcome of this new bubble may not be as harmful to homeowners and the economy, it could very well hurt those late comers.

The speed of the federal reserve rate hikes will have a say on whether the bursting of this bubble is a messy one or not. A Federal Reserve way behind the curve trying to contain inflation will hold the key to this dynamic.