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Home Prices Rise… Is a Housing Bubble Forming?

We recently reported that home prices are continuing to rise across most of the nation.  This has created concern in some pundits that a housing bubble, like we saw ten years ago, is forming again.  We want to explain why these concerns are unfounded.

The current increase in home values can be easily explained by the theory of supply and demand.  Right now, the number of families looking to purchase a home is greater than the supply of homes on the market.

Here’s a chart that explains how the months’ supply of housing inventory impacts values:

According to the latest Existing Home Sales Report from the National Association of Realtors, there is currently a four-month supply of inventory.  That puts us in the blue section of the above graphic. Home prices should be appreciating.

The difference in 2006…

A decade ago, the demand for housing was artificially boosted by lending standards that were far too lenient.  Today, the strength of the demand for housing is legitimate, as lending standards are nowhere near what they were a decade ago.

For proof of this, let’s look at a graph of the Mortgage Bankers’ Association’s Mortgage Credit Availability Index:

The higher the number, the easier it was to get a mortgage.  We can see that from June 2005 to June 2007, mortgage standards were much more lenient than they have been over the last nine years.

Bottom Line

Today’s price increases, unlike those a decade ago, are the result of qualified buyer demand exceeding the current inventory of homes available for sale.  Once the supply increases, prices will level out.

Editor’s Note:  Supply and Demand is a local phenomenon.  There is no national real estate market.  Keep an eye on what happens locally to gauge what is happening in your market.

  1. Comment by Andy
    March 22nd at 10:34 am 

    Artificially low interest rates increases purchase power increasing prices. A bubble is forming in some markets. Whenever things get irrational. The writing is on the wall.

  2. Comment by Dan
    March 22nd at 12:56 pm 

    No money down loans with cash credit towards a down payment depending on the terms, 585 credit scores accepted, and debt to income limits approaching 50%. Yes, I see another housing crash in the near future.

  3. Comment by Bob
    March 22nd at 11:26 pm 

    I live in an area with some of the greatest population growth in the country, and the local governments refuse to open up land for residential development. A bubble is definitely forming… BIG TIME. Supply will not increase. The government is intentionally creating the next housing bubble here.

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