There are some industry pundits claiming that residential real estate values have risen too quickly and that current home values are on the verge of another housing bubble. It is easy to see how this thinking has taken form if we look at a graph of home prices from 2000 to today but are we truly heading into another housing bubble?
While prices are rising, the crash in 2008 had different causes that are not present in today’s housing market. In 2008, housing demand was artificially inflated due to lenient mortgage standards and, as a result, caused prices to skyrocket and home builders to become overly ambitious.
The combination of excess home construction and borrowers obtaining mortgages they did not truly qualify for flooded the market with distressed properties that laid the foundation leading to the housing crash. (Mortgage backed securities and derivatives of those mortgage back securities caused further collapse of the US Economy but for the sake of this conversation we are looking at housing prices, new home construction and the mortgages that funded home purchases during that time.)
What is different in the housing market now from the housing crash of 2008? For one, lending standards are nowhere near as lenient as they were in the early to mid 2000s. Before, borrowers just needed to write down their annual salary and that was it.
Now, borrowers need to provide documented proof of their assets and income and then have it verified by a third party before they can obtain a home loan. This insures that borrowers are truly qualified and that the loan performs properly rather than falling into foreclosure.
Additionally, home builders now are not overly optimistic and are building at what they think is a justifiable rate compared to demand. Some markets may even argue that an increase in new home construction is needed due to the lack of supply to meet demand for home buyers.
Home prices are on the rise, but less than half the homes nationally have returned to their prices pre-housing crisis. In reality, prices are appreciating as they normally should (when we use the normal annual appreciation for residential single family homes of 3.6% annually). If the crash had not occurred, prices would actually be greater than they are today. Some are concerned that our economy is due for a recession given the historical length of economic cycles but it is important to consider the amount of time it took for the US Economy to recover from the Great Recession of 2008.
Mortgage lending standards are regulated, new construction is below what is necessary and home prices have yet to truly recover in many markets. It appears that fears of a housing bubble may be over-exaggerated at this time. Another recession happening in the future is by no means out of the question but at this time it appears it would be due to some other economic or sociopolitical reason rather than a collapse of the real estate market.