economist: ‘This is no housing bubble’

05/02/2015 economist: ‘This is no housing bubble’

CHICAGO – April 30, 2015 – Home prices are rising more rapidly than they did just a few months ago, as demand outpaces supply. Existing-home sales surged 9 percent year-over-year in March, and home prices rose 8 percent over last year, according to the National Association of Realtors®. In addition, tight inventories plague many markets.

With home prices heating up again, could the housing market be heading for another bubble? Jonathan Smoke,'s chief economist, says no.

"During the peak years of the housing bubble, from 2003 to 2005, the data on supply versus price appreciation looked very similar to what we are seeing now," writes Smoke. "But there are key differences, which is why I'm confident that on the national level, this is no bubble."

Smoke says today's home price increases will stick because the market is correcting for severe price declines in the recent past. Prices rose 7 percent and 12 percent in 2012 and 2013, respectively; but median prices have climbed less than 8 percent on a compounded annual basis over the past three years.

On the other hand, from 2002 to 2005, median prices rose 10 percent on a compounded annual basis – and had no justification for that upward bounce from a prior decline, Smoke says.

"On an inflation-adjusted basis, we are 30 percent beneath the peak set in 2005," Smoke notes. What's more, "relative to rents or incomes, median home prices are not 'unhinged' from long-term averages."

In 2005, the price-to-rent ratio was 35 percent higher. Currently, the price-to-income ratio is where it was in 2001 and about 30 percent below where it was in 2005.

Smoke also says that mortgage financing saw rapid expansion during the housing bubble, and flipping activity by speculative investors soared – neither of which is occurring now.

"Today's higher prices are only to be expected as the economy improves and first-time buyers gradually return to the market," Smoke writes. "Eventually, those higher prices should encourage more owners to list their homes and builders to start construction on new housing – which, in turn, should solve the problem of supply."

Source: "Home Prices Are Climbing Faster and Faster, but This Is Not a Bubble,"® (April 24, 2015)

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