June 20, 2013

Is Another Housing Bubble on the Way?

There has been some speculation in recent weeks that the rapid increase in home prices are going to eventually lead us to another housing bubble. We are here to address these fears. While it is true that Seattle has seen an increase in home prices over the past months, we will explain how our housing situation is different than what brought on the most recent home crisis.

What is a Housing Bubble, exactly?

Essentially, a housing bubble refers to a run-up of housing prices, fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand, in the face of a limited supply, which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At this stage, the “bubble” has blown up quite large. At some point, demand decreases, or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the so-called bubble bursts.

Last Housing Crisis

During the most recent housing crisis, real home prices increased 62 percent. When the bubble burst, prices fell 47 percent. This three-quarter decline was much larger than historical declines, even after adjusting for differences in the pre-peak rise in prices.

Why We Don’t Need to Worry About Bubble Fears

The sharp increases in prices are starting to make people feel on edge. May marked the 15th straight month of annual price increases, the first time that happened since May 2006. Home prices have been driven higher partly by a drop in foreclosures. Only 18% of home sales in the month were distressed sales, which typically sell at a discount. A year ago, 25% of sales were distressed sales. The year-over-year rise is now 15%, and prices are at levels last seen in the summer of 2008, just before the bursting of the housing bubble.

No need to worry though. While home prices are on the rise, the circumstances of today’s market are quite different from 2008. The boom period was marked by easy credit and overbuilding, but today we have tight mortgage credit and widespread shortages of homes for sale. The improved housing market and mortgage rates are still near record lows, despite a recent rise in rates, is pulling buyers back in the market faster than it’s prompting sellers to put homes on the market. Generally, the increase in supply in context of current tight underwriting standards should deflate the risk of any bubbles.

Have Questions? 

Team Troy is your Seattle market experts. If you are wondering what your Seattle home is worth in this rapidly changing market, give us at call: 206-588-8409 or visit our custom market insider tool: http://www.bellevueseattlehomes.com/mimarket/zip/98188/