Some are worried that because housing prices are appreciating at levels that far exceed historical norms, the market is headed for another housing market bubble. To calm this fear we need to examine what caused the bubble ten years ago.
Ten years ago mortgage lending standards were way to lenient, which fabricated a demand for housing. Buyers that were not qualified to purchase a home were able to attain a mortgage anyway. Home prices skyrocketed. The demand for homes caused home builders to overbuild.
Eventually, a housing market bubble erupted with the excess of new construction and the flooding of the market with foreclosures & short sales. It was the lack of appropriate lending standards that lead to the housing crash.
Where we are today…
- Looking at lending standards based on the Mortgage Credit Availability Index released monthly by the Mortgage Bankers Association, we see that, even though standards have become more reasonable over the last few years, they are nowhere near where they were in the early 2000s.
2. Looking at new construction, we see that builders are not “over building.” The average annual housing that started in the first quarter of this year were not just below numbers recorded in 2002-2006, they are below starts going all the way back to 1980.
3. Looking at home prices, most homes haven’t even returned to prices seen a decade ago. Trulia released a report noting:
“When it comes to the value of individual homes, the U.S. housing market has yet to recover. In fact, just 34.2% of homes nationally have seen their value surpass their pre-recession peak.”
Mortgage lending standards are appropriate, new construction is below what is necessary and home prices haven’t even recovered. It appears fears of a housing bubble are over-exaggerated.
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