Is the Next Bubble Coming Soon? If prices keep rising as fast as they are today, we’d be back in bubble territory in several years. However, prices are unlikely to keep rising as fast as they are today, for three reasons: 1. Inventory should expand. Tight inventory is boosting prices today as buyers bid up prices on scarce homes; however, as prices continue to rise, more people will sell as they get back above water or decide to cash out, and more new construction will add to inventory. 2. Mortgage rates should rise. Low mortgage rates today increase buying power because borrowers can afford a more expensive house for the same monthly payment. Rates are likely to rise as a result of the strengthening economy, either through market forces or Fed actions, which – along with more inventory – should slow down price gains. 3. Investor interest should fade. Undervalued prices have attracted investors, who have helped push up home prices as they have bought and rented out homes. But as prices rise, investor interest will fade. Will expanding inventory, rising mortgage rates, and declining investor activity cause home prices to plunge? Slow down, yes, but probably not plunge. Just as these factors should cause home prices to slow down, job growth and increased household formation should support a continued recovery in housing demand. Is Another Bubble Coming Ever? Even though we’re not in bubble territory today, another one is coming – someday. The history of American real estate is full of speculation, bubbles, and busts. Trulia’s own survey of consumers shows that most people expect prices to get back to the peak of the previous bubble again in the next 10 years – including people in housing markets where prices had been overvalued most. Furthermore, our rent-versus-buy analysis, which indirectly reveals where people expect prices to rise the most long-term, shows that people expect future prices to rise more if they live in metros where booms and busts were more common in the past. This is another sign that people seem to think prices go up but not down. Will government help to prevent another bubble? Perhaps the new mortgage rules will help – but the more cynical answer is “no.” The most recent bubble was more severe than earlier housing bubbles, and if we didn’t previously learn from the past, then why should we learn from it now? In short: housing bubbles look almost inevitable. Whether you’re buying a home, selling a home, or setting housing policy, remember that the next housing bubble is probably just a matter of time. But, as Trulia’s Bubble Watch shows, that time is not now. Notes: To get our estimate of over- or undervalued prices, we averaged together several measures of prices relative to fundamentals, including the price-to-income ratio, the price-to-rent ratio (national only), and the deviation of price growth from trend. We compared current values of these measures to the long-term average, excluding the most extreme quarters from the long-term average. We used the Trulia Price Monitor for current price trends as well as the Case-Shiller national index, the Federal Housing Finance Agency (FHFA) national expanded-data index, the FHFA all-transactions price indexes for metros, national and metro per-capita income from the U.S. Bureau of Economic Analysis, and national owner-equivalent rents from the U.S. Bureau of Labor Statistics. Our historical time series goes as far back as the early 1980s, depending on the data source. We tested our approach by seeing how well our over-/under-valuation measure would have predicted metro-level price drops in the housing crash. The correlation between metro-level price over- or-undervaluation in 2006 Q1 and the subsequent metro-level peak-to-trough price decline was -0.83. By: Trulia]]>
