It’s no secret; home prices all across the country are rising. This is certainly good news for sellers, but buyers now have to compete over the best houses on the market. Is it possible that another bubble is being created?
We are just one decade removed from the biggest housing collapse we have seen in America. That crisis happened after the market soared and many are scared we are headed for a similar fate.
The Difference Between Now and Then
While many may be worried soaring home prices means we are headed towards another bubble, it’s important to remember what happened in 2007 and 2008. The collapse of the housing market wasn’t due solely to higher home prices. Instead, it had quite a bit to do with the lending practices, which have since been cleaned up.
It’s understandable that many think we could be heading back to another house price bubble. The wounds from a decade ago are still fresh for some and the warning signs are present. Some of the reasons many think a bubble is coming include:
- The past five years have seen housing prices soar.
- The growth of housing prices has outpaced the growth of income by more than 40% over the past 17 years.
- Metropolitan Statistical Areas are starting to show a very high house-price-to-income ratio and it has grown since 2011. When the housing collapse happened, 27 of the largest metropolitan statistical areas showed unusually-high price-to-income ratios.
- The number of metropolitan statistical areas with high house prices per square foot is on the rise.
These signs were evident when the last bubble hit and many think a bubble could be on the way because of these signs.
How to Define a Housing Bubble
A housing bubble happens when prices rise because people expect them to rise and the price increases even more because investors bid up the prices. It’s usually something predicable by many, but many will talk themselves into thinking there isn’t a bubble and a pricing bubble won’t happen.
When the prices get too high, the bubble will burst. This is something that always happens with a pricing bubble; it bursts. When this happens, price correction will begin.
The final thing necessary for the bubble to grow is easy credit. This helps the bubble keep growing and this was one of the major factors of the housing collapse a decade ago.
A bubble may be avoidable and there are some glaring differences between the collapse and the market today. The lack of inventory is one of the difference and homes priced appropriately are selling very fast. Lenders caused the last issue and most of the lending practices responsible for contributing to the collapse have been cleaned up. While a bubble is possible and some think it’s on the verge, many believe the market is very strong and will continue to grow.
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