Central Florida Home Prices Can't
Go Straight Up Forever…
…But this isn't a bubble!
Home prices in the Orlando Area and all across the United States are climbing at the fastest pace in history, eclipsing even the boom in the days leading up to the Great Recession. Bidding wars have become common, many are forced to pay all cash and some bids are coming in $1 million over asking.
It's all sparking fears that the United States is in the middle of another housing bubble that will end in a terrible crash. Industry executives and economists agree this explosion in home values is unsustainable, as home prices can't go up 20% year-over-year forever.
Yet today's housing market is very different from the mid-2000s bubble that wrecked the economy.
Unlike then, there is currently a massive shortage of homes and home builders are being very cautious about adding new supply.
The other key difference is that banks, home buyers and regulators appear to have learned a painful lesson about the pitfalls of overborrowing.
"In some ways this is an even hotter housing market than before the Great Recession," said Aneta Markowska, chief economist at Jefferies. "But the risk of this turning into a bubble is much lower."
Economists at Bank of America concede that home prices may correct lower in some markets in the short to medium term. Still, the bank told clients in a recent note that a "hard landing is unlikely" this time around.
'We have a housing shortage'
Of course, Bank of America acknowledged that "bubbles are notoriously difficult to identify in real time." They only become obvious in hindsight. That's what makes them bubbles.
Still, today's supply situation is the opposite of the glut in building 15 years ago: Back then, there was a massive overbuilding problem. At the peak, around 2 million homes were being built per year, compared with just 1.6 million today. "Ultimately, we ended up with excess supply. That's what caused the market to crash," said Markowska.
As of today, there are just 1.25 million existing homes for sale. That's down almost 19% from a year ago. At the current pace, it equates to just 2.6 months of supply, or less than half of the six months viewed as a balanced market.
"We have a housing shortage. In shortages, prices don't decline," said Lawrence Yun, chief economist at the National Association of Realtors.
Home prices surged by 16.6% recently accelerating from the 14.8% gain the month before, according to data published Tuesday by S&P CoreLogic Case-Shiller Indices.
The latest figures mark the biggest annual gain in home prices since the group began tracking the metric more than 30 years ago. Home prices spiked by 25.9% in Phoenix, 24.7% in San Diego and 23.4% in Seattle, according to the report.
Meanwhile, existing home prices continued to grow, according to the NAR. The median price for an existing home hit a record $363,300 last month, up 23% over the prior 12 months.