A client I met with recently said he had decided it was time to sell, and mentioned the possibility of a new housing bubble. With strong home value appreciation he isn't the only one voicing worries that a new housing bubble may be forming. But there are reasons that indicate that isn't likely at this time.
A Fortune.com post on April 30, 2016, headlined Warren Buffett: There Is No Bubble in Real Estate. They said that Warren Buffet "thinks the chances of housing prices collapsing are very low… he didn't think it would be the source of the next problem for the financial system. Buffett said housing is not as good deal as it was in 2012, but he didn't think housing looked overpriced now either."
Here are some of the differences between now and the time of The Bubble in 2006 and reasons why it isn't likely at this time. Charts below are from the Minneapolis Area Association of Realtors for Twin Cities statistics through March 2016.
1. Higher loan quality
Even though credit conditions are loosening, it is nothing like it was during The Bubble. Now, it is a relaxing of overly stringent conditions to more realistic ones. Anyone who has financed recently will tell you it seems like they are asking for an unbelievable amount of documentation and jumping through one hoop after another. During The Bubble people were getting loans with little or no documentation, very low credit scores and no money down and/or no income verification. Subprime loans are now virtually non-existent and the percentage of delinquencies has dropped from over 10% to just 3.2%. Appraisals are also cautious, helping keep prices in check.
Exceptionally low interest rates have kept homes affordable in spite of rising prices. When The Bubble began in 2006, housing affordability was indexed at 100 nationwide. An index of 100 means that a family earning median income qualifies for a mortgage on a median-priced home. The index peaked in 2012 at 208, meaning that same family had 208% of the income needed to qualify for a median priced home. In March 2016 the national index was at 175, and according to data from the Minneapolis Area Association of Realtors it was at 187 for the Twin Cities metro area thanks to continued low interest rates.
Prices are currently being driven up because of the laws of supply and demand… low inventory is actually a sign of a healthy housing market and is supportive of higher pricing. The Bubble was preceded by high inventory levels. Our current low levels of homes for sale may be frustrating for buyers, but it isn't a bad sign for the housing market… it is a sign that there are more buyers than sellers.
4. Demographics are favorable
Median age for first time home buyers is 33, and the Gen X generation turned 33 at the beginning of The Bubble. The population of that generation was much lower than either the Boomers before them or the Millennials after them, and there were not enough Gen Xers to absorb the excess supply in the housing market at that time. Millennials are now turning 33 and we have a huge crop of new buyers putting pressure on demand.
5. Low home ownership rates
Home ownership rates nationwide are as low are they were in 1994… meaning there is a huge pool of renters available to purchase homes.
6. Low unemployment rate
At the beginning of The Bubble in 2006 the unemployment rate was 7.3% nationwide, rising dramatically to about 10%. Today we are at 5% nationwide and 3.7% in Minnesota in March 2016. Job stability gives the ability to secure loans to purchase homes, contributing to a healthy housing market.