California just set a new record for home prices, rising by almost 25% from the same time last year to a median of almost $760,000. Does that mean that the market is in another bubble? Much of the increase in home prices can be explained by 3 factors: low inventory, low-interest rates, and high demand.
So, will the increase in prices and shortage of housing inventory result in a housing market crash in 2021? Most experts don’t think so. When addressing whether or not today’s intense buyer competition and rising home prices are evidence of a housing bubble, Lawrence Yun, Chief Economist for the National Association of Realtors (NAR), said that this “is not a bubble. It is simply a lack of supply. Today’s housing market is healthy, and rising prices are driven by real buyer demand. “
The “housing bubble” still remains a major concern for most Californians. Google Trends, which tracks searches on Google for “housing market trouble” shows in its tracking that searches with the words “housing bubble” have increased approximately four times the amount over the last year.
To help us in understanding if we are in one, let’s first take a look at what a housing bubble actually is. A housing bubble occurs when home prices rise at a rapid rate to a level of instability. Housing bubbles generally begin when there is a shortage of inventory and an increase in demand in a market. This is what we currently have, but is that the whole picture when a bubble typically exists? No, it isn’t.
Although housing, as opposed to other industries, doesn’t see as many bubbles, it can occur with the right combination of factors. Those factors include; a rise in economic activity, low mortgage interest rates, low inventory, high demand, speculative and risky behavior, new mortgage products, and loose mortgage lending practices. So, what is different this time around compared to 2006-2007? The main difference is that we don’t have most of the listed factors, specifically, the loose mortgage lending practices. Loose mortgage practices were a major factor that led to The Great Recession from 2006-2007, as many lenders offered home loans to homebuyers with little regard for their ability to repay. Irresponsible lending was primarily the cause. The circumstances influencing the housing market today are very different. Mortgage requirements are stricter and the current demand isn’t caused by reckless lending.
Waiting for the bubble to burst before you purchase can actually cost you. That topic will be covered in our next blog.
