Are we headed for another housing bubble?
I get asked this question quite a bit lately as median home prices have been increasing the last few years. Nationally home prices are up over 8% last year according NAR. Locally, Twin Cities, MN, home prices are up over 7% year over year. So yes, real estate market values are out pacing the historical average of 3% a year so it would be easy to assume we are headed for a correction.
Some things that are different this time vs. 2003-2005 is that we are coming from a steep correction in which we saw values decrease 12.5% and 17% annually over the 2007-2008 time periods. Financial instruments and mortgage products were easier to obtain and far more available to a greater pool of buyers. I remember listening to radio commercials offering loans up to 125% loan to value!
Realtor.com's chief economist Jonathan Smoke had this to say “On an inflation-adjusted basis, we are 30 percent beneath the peak set in 2005,” Smoke notes. What’s more, “relative to rents or incomes, median home prices are not ‘unhinged’ from long-term averages,” Smoke writes. In 2005, the price-to-rent ratio was 35 percent higher. Currently, the price-to-income ratio is where it was in 2001 and it is about 30 percent below where it was in 2005." Which means that prices today are more in line with what people can afford and what people are paying in rent than they were during the last run up to the housing bubble in 2003-2005.
So, do I think we are heading to another housing bubble? No. However, there are factors that I believe will slow the price appreciation in the next few years and we will return to a "normal" market of 3% per year price appreciation:
1. Rate increases - when the Fed finally decides to start raising rates and mortgage rates follow, this could slow purchases down and affect house values as purchasing power is decreased.
2. Wage growth - Real wage growth has not happened in quite some time, so for housing values to keep in increasing personal incomes have to as well. So at some point values will go from very affordable as they are now, to less affordable, at this point I think we will return to the more sustainable and realistic average of 3% a year market value appreciation.
Thank you for reading.