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Another Housing Bubble?

I’ve gotten this question quite a few times lately, and wanted to provide some insight into how the recent improvements in the housing market are not the same as the last run-up we experienced.  In three short graphs and hopefully some additional points we can better understand why the development of another housing bubble based on the course we are on today, is highly unlikely.

The following map shows price appreciation for the last 12 months state by state.  You can see that some states have seen double digit price appreciation.  Exactly the kind of thing that happened in the early 2000’s.

There are however a few key elements that are currently missing.

A large gap between the cost of owning and cost of renting also called home affordability.  Before the housing bubble, it was much cheaper in some markets to rent than buy.  Why did people buy anyway?  Well, because they saw the appreciation they were missing and didn’t want to be left behind.  Poor lending standards made this worse. (actually it’s traced back to government intervention in lending and banks moving to keep up but that’s a discussion for another day)

Another element was investors that were buying not based on sound fundamentals, the rental prospects of the property but based on appreciation alone.  Cost of owning vs. renting has not experienced this divergence and lending standards have not loosened much since the crisis unfolded.

The following graph illustrates how close each state has come to catching back up to their respective peaks.  The green states never really experienced the run-up that the coasts experienced.  While they are setting new highs, this isn’t alarming because they didn’t experience the lows or have to sell off excessive levels of un-needed and distressed housing inventory.

 

Finally, unlike in the past when appreciation was being fueled by record levels of home ownership on the back of poor lending standards, today what we are seeing is that appreciation has been correlated to supply and demand of housing, aka inventory.  An inventory below 6 months is considered a sellers market where you’ll experience above average appreciation.  This graph shows nationwide inventory and the trend is returning to a balanced market.

In the North Dallas area, we are experiencing much tighter inventory than the above illustration, around 2-3 mo but inventory  has gradually been going up since the Spring of 2014.  While this still reflects a sellers market, it is a more balanced market than earlier this year when in some cases there was only 2 weeks of inventory when multiple full price offers were common. In our market, that is hotter than most at this time, we are experiencing some better than historical appreciation.  That being said, that appreciation rate is slowing down vs. heading out of control.  If inventory levels gradually increase as they are today, we should arrive at a more balanced market in 2015.

 

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Jeff Kofahl

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