A housing bubble is best defined as a run-up in housing prices that is spurred by demand and speculation. An increase in housing demand, in the face of limited supply, encourages speculators to enter the market. Speculators believe that huge profits can be made through short-term buying and selling, which further drives demand. Supply catches up and surpasses demand at some point, which results in a sharp decline in housing prices. Thus, the so-called housing bubble bursts.
At present, there seems to be no housing problems in sight. However, surging home sales and prices once again are raising affordability questions. There is a reason for concern. Wages have only risen by two percent annually. Mortgage rates, accelerating quickly, have reached their highest level of the year and rates are expected to increase through 2016.
Today’s Real Estate Market
So, is there a housing bubble about to burst? Some “armchair” analysts have suggested that a bubble collapse is imminent. Hard facts may suggest a different scenario. The conditions in today’s housing market are fundamentally different from those from a decade ago. Credit, a decade ago, was relatively easy to obtain. Home sales topped at eight and a half million annually. New-home construction was robust as well, and topped two million annually.
By comparison, today’s credit is water tight. For the past eight years, mortgage balances have fallen. With tighter credit limits and better-qualifying homeowners, the number of mortgage defaults are less likely. Homeowners are paying their mortgages on time and fewer are cashing out with refinances. Additionally, fewer homes are being built or sold as compared to a decade ago.
The Nagging Question of Affordability
Will affordability strangle home buying, even in today’s positive market? Nothing is impossible. Home prices are expected to rise without compromise as long as mortgage prices remain under six percent. Above six percent, home prices may spiral out of reach from a number of home buyers. Perhaps in two years, mortgage rates may cross the six percent line and fewer houses will be sold. If that happens, supply may outstrip demand and housing prices will have to tumble to move inventories. In the meantime, renters, are feeling the heat from rents that are rising faster than household incomes.