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Don’t Worry – Housing Bubble Rumors Are Bogus

by Peter Thomas Ricci

Some overzealous folks have begun throwing around the “bubble” word in their coverage of the current housing market, but such statements are way off.

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Home prices on the national scale have been doing quite well in recent months; in fact, they’ve been doing swimmingly, with year-over-year increases that match the 2005-2006 years. In CoreLogic’s Home Price Index, for example, yearly increases have jumped from 1.08 percent in March 2012 to 10.5 percent in March 2013, an increase of nearly ten-fold!

Such increases, inevitably, have spooked some analysts and journalists, and some have begun throwing the “bubble” word around to describe today’s increase in home prices. Is such a vocabulary accurate, though, especially given the havoc that the last housing bubble wreaked? Thankfully, Trulia’s Chief Economist, Jed Kolko, has looked at the data, and has found that regarding a housing bubble, we’re not even close to such a scenario.

Overvaluing Undervalued Home Prices

For his analysis, Kolko asked a simple question: where are home prices today, relative to their fundamental, historic price? Using that measure, here’s what he found:

  • Even with the aforementioned increases, home prices today are still undervalued by 7 percent; after rising 39 percent above their fundamentals during the housing bubble of the last decade, prices fell to as low as 15 percent below fundamentals in the fourth quarter of 2011.
  • So basically, home prices are still below their historical norms, and are still much lower than the peaks of the housing bubble.
  • Even the metropolitan areas that have seen the strongest post-bubble price increases are not showing bubble-like symptoms. For instance, home prices in Orange County are 9 percent higher than market fundamentals, but during the bubble years, prices shot up 71 percent above fundamentals! The narrative is similar for Los Angeles, where the area’s 5 percent increase today pales in comparison to its bubble high of 78 percent.

The Un-Reality of a Housing Bubble

Okay, so a housing bubble is not happening right now – could one, though, come about in the near future?

That is unlikely, Kolko wrote, and for three reasons: first, today’s low housing inventory has put upward pressure on home prices, but as inventory inevitably expands (via more sellers and more new construction), price increases will ease; second, mortgage rates are at historic lows, and though the extra buying power for consumers has give home prices an additional jolt, mortgage rates will rise, and likely slow price growth as a result; and third, arguably the most essential ingredient in today’s recent home-price increases has been aggressive investors, who have purchased boatloads of distressed homes for bargain prices – with prices rising, though, investor interest will likely fade, and they will stop driving up price.

In short, there is much to be said about today’s housing market, but “bubble,” thankfully, isn’t one of them.

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