October 25, 2016

3 Reasons We're Not in a Housing Bubble

-A A +A

3 Reasons We're Not in a Housing Bubble

Home prices are rising three to four times faster than wages while credit conditions are loosening, Lawrence Yun, chief economist for the National Association of REALTORS®, notes in his latest column at Forbes.com. These kinds of conditions usually prompt housing analysts to start uttering the words "housing bubble," but Yun discounts those warnings.

The Fears Around a Bubble

Should Housing Fear a Tech Bubble?

6 Reasons Why a Housing Crash Isn't Likely

Home Prices Reach an All-Time High

"Even though the credit conditions appear to be easing somewhat, the move is from overly stringent conditions to not-so-overly-stringent conditions," Yun writes. "It is a far-fetched view to imply the current mortgage approval process in any way resembles the loosey-goosey, easy subprime mortgage access conditions of a decade ago."

Indeed, mortgage credit scores are nowhere near where they were during the housing bubble. Today, scores are at about 740 to 750 compared to 710 to 720 during the housing crisis, according to Fannie Mae data. Also, the no-doc requirements for subprime mortgages of yesteryear are nearly gone today.

Yun also notes that while home prices are rising above wages, low mortgage rates have been a silver lining.

"For someone making a 20 percent down payment, the monthly mortgage payment at today's mortgage rates would take up 15 percent of a person's gross income," Yun writes. "During the bubble years, it was reaching 25 percent of income."

Finally, Yun says you can squash those bubble fears by just looking at the housing supply. Inventories are at about four to five months today, which is similar to the bubble years. However, sales aren't moving at the same pace. Existing-home sales and new-home sales combined were at 8.4 million back then. In 2015, combined home sales were 5.76 million — about one-third lower, Yun notes.

The limited supply of homes for sale is what mostly is behind the latest home-price increases, he says.

"We are not in a housing market bubble in terms of an inevitable impending home-price crash," Yun says. "Rather, we are facing an above-normal home-price growth trend, which admittedly is unhealthy on several levels because of the simple economic law of insufficient supply. We need more homebuilding."

Source: “Are we Entering a New Housing Bubble?” Forbes.com (March 14, 2016)