The previous decade’s burst of the real estate bubble, with its plummeting local house prices and accompanying economic dislocations, made a lasting impression. For most homeowners the damage was strictly psychological: the majority weren’t even tempted to sell while area house prices were dropping (or hovering below what they darned well knew were way beneath reasonable values).
That was a half-decade ago, and since then, prices have been in recovery mode—with gusto. In fact, last year the rises across the nation were so steep that we began to hear grumblings about a new real estate bubble starting to form.
The numbers did suggest a rambunctious market: a 20+ month streak of double-digit year-over-year U.S. price appreciation (by August of this year, a 6.5%). For homeowners, any rise in town house prices certainly comes as relief from the emotional distress of seeing sale prices below common sense levels. But having so recently experienced the ‘bubble’ burst, it was easy to begin to worry about the same cycle already in progress…again…?
Some good news, and a convincing analysis, has just been produced from one of our most reliable sources. The author, Mark Liu of CoreLogic, released “Another Look at U.S. Housing Market Conditions” late last month. He thought it time to examine “suggestions that a housing bubble is reemerging” following the release of the latest figures that continue to show improving house prices. Others have discounted the ‘bubble’ formation idea, but this time, Liu brought some unusually clear logic to the discussion.
Simply put, he reasoned that since homeowners use their income to pay for home mortgages, in any local market, house prices over the long run can’t be sustained if they grow faster than income. If house prices rise faster than income for a long time, an unsustainable ‘bubble’ will have formed (and, of course, will eventually pop).
During the last bubble years—January 2005-November 2007— in the largest 50 markets, home prices were more than 10% above sustainable levels. During the bubble’s ‘pop’ (from late 2010 to mid-2013), home prices fell to “levels of less than 10% below the sustainable price.”
And even by August of this year, house prices still remained 6% below the long range sustainable price. Not only is this not what anyone would call a bubble, instead it seems to lead to the conclusion that prices will have to rise faster. Local homeowners will be even more pleased at Liu’s forecast through the end of 2016: prices will still remain 3% under sustainable levels—in other words, nothing like a bubble!
Whether you’re looking to buy or sell a local home, rising prices at sustainable levels is a pretty encouraging action scenario…and a pretty good first action will be to give us a call!
