We’re Not in a Housing Bubble. Here’s Why:
The trend in recent years shows that home prices in the U.S. have seen a constant increase, in spite of wages staying pretty much the same. Add the fact that credit conditions are loosening, and you've got all the ingredients you need for the next housing bubble. Are we really headed for another one?
In a column written by National Asociation of REALTORS® chief economist Lawrence Yun for Forbes.com, he discounts those warnings.
Yun acknowledges that home prices are rising at 3 to 4 times the rate of wage increases. He also notes that credit conditions are loosening and making it easier for more people to buy homes. BUT, "Even though the credit conditions appear to be easing somewhat, the move is from overly stringent conditions to not-so-overly-stringent conditions," Yun writes. "It is a far-fetched view to imply the current mortgage approval process in any way resembles the loosey-goosey, easy subprime mortgage access conditions of a decade ago."
A good indicator for the difference in current market conditions from the previous housing bubble are the mortgage credit scores. Today's scores are at 740 to 750; during the housing crisis, scores were at 710 to 720. This data from Fannie Mae have loads to tell about the difference between then and now. Today is also different from the previous housing bubble; no-doc requirements for subprime mortgages used to be thing-- today, not anymore.
Yun also explains that home prices may be rising more than wages, but the real game changer is today's lower mortgage rates:
"For someone making a 20 percent down payment, the monthly mortgage payment at today's mortgage rates would take up 15 percent of a person's gross income... during the bubble years, it was reaching 25 percent of income."
Lastly, the best sign that we are not in a housing bubble is the current housing supply. We currently have inventories at about 4-5 months (similar to the bubble years), BUT sales are moving at a totally-different pace.
Existing-home Sales and New-home Sales
Housing Bubble Years: 8.4 million
2015: 5.76 million (about 30% lower)
Based on this data, it is safe to claim that the rise in home prices can be attributed to the limited supply of homes for sale.
"We are not in a housing market bubble in terms of an inevitable impending home-price crash... we are facing an above-normal home-price growth trend, which admittedly is unhealthy on several levels because of the simple economic law of insufficient supply. We need more homebuilding."
To access the complete Forbes.com article, please click here.