Mid-Year Housing Market Update: Reducing Concerns about a New Bubble Forming

Rising home prices seems like positive news for all homeowners, but some see rising prices and worry about a new housing bubble. How do rising home prices impact you and your plans for the future? Should you sell now or wait? Is this a good time to buy? Many people can’t help but wonder if ...

Rising home prices seems like positive news for all homeowners, but some see rising prices and worry about a new housing bubble. How do rising home prices impact you and your plans for the future? Should you sell now or wait? Is this a good time to buy? Many people can’t help but wonder if rising home prices indicate a return to the bubble market of 2008. What’s the wisest path for you?

As we look at the data from the past 6 months, the past couple of decades and beyond, we do not see another housing bubble forming, and we believe this is an excellent time to both buy and sell. Here’s why.

A New Perspective

Most of us tend to focus only on the time period between the bubble and now. And doing that, we can see why people might think we’re reaching another peak.

But let’s look at things a little differently. Let’s take the bubble out of the picture.
What does the market look like if we adjust for the bubble and the burst? Where would the housing market be with normal appreciation?

Starting at 2000, a historical average appreciation is 3.6%. If prices continued to appreciate at normal levels without that bubble and burst, we’d be just about where we are with prices.

HistoricAppreciation

Home prices are appreciating at a normal rate.

A History Lesson

As competition for listings increases, prices go up. And as prices go up, concerns about affordability begin to surface.

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How does affordability impact housing prices? If affordability is decreasing, does that mean a bubble will form again? Let’s take a look at the housing affordability index from 2009 to today.

AffordabilityIndex

From the index, we can see that affordability is a little bit less than it was 8 years ago. But let’s look beyond the numbers with a more holistic view. Let’s really think about what makes sense. What was happening between 2009 and 2016?

  • Distressed properties and foreclosures were selling in some markets at much as a 50% discount.
  • Short sales that were selling for anywhere from a 20 to 30% discount.
  • Even non-distressed properties were discounted because they were competing against distressed properties.

Let’s also take a cue from our history professors and look back a bit further in time to 1990.

  • Today’s affordability index is greater than it was at any point from 1990 to 2008.
  • The monthly mortgage payment on a medium-priced home in the US has gone up over the last couple of years. However, if you look at a longer timeline, you see that the rise is actually quite reasonable.
  • Buyer confidence is more of an issue than affordability. Ivy Zelman states in her Z Report: “The risk is not that affordability of potential entry-level homebuyers is unreasonable … Affordability is still stronger than historic norms. Rather, the concern arises from the compounding effect higher mortgage rates and escalating home prices can have on the near-term psyche of buyers, limiting confidence in the equation.”

The Truth about Mortgage Rates

Since the beginning of the year, many experts were predicting that mortgage rates could increase to as high as 5.5% by the end of the year. However, rates are actually down from where they were at the beginning of the year. They’ve been a bit volatile, but if you look at the trend line, you’ll see that the trend line goes straight down from left to right.

Fannie Mae, the Mortgage Bankers Association and the Association of REALTORS have lowered projections of mortgage rate increases. They’re now predicting that interest rates won’t be at 5 or 5.5 percent by the second quarter of NEXT year. They predict they’ll be closer to an average of 4.66 percent. They’re still rising, so waiting to buy is not wise, but they’re not rising at a rate that creates concern about bubbles and bursts.

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These stable and most slowly rising mortgage rates are allowing housing prices to continue to rise at a reasonable, expected rate.

Calm Waters

With the data we’ve gathered on appreciation, affordability and mortgage rates, we feel that there’s no reason to worry that a bubble is forming. Homeowners should feel good about rising home prices as indicating appreciation for their investment. Buyers should feel confident that this is a good time to invest in a new home. All in all, homeowners can feel good about the state of the housing market at this mid-point of 2017.

Please contact us today with any questions you have about the housing market or if you’re considering buying or selling a home. We’re always happy to help!