While rapid price gains have recently prompted fears of another “housing bubble,” recent reports from Capital Economics and Redfin asserted no such bubble is forming—at least not on a national level. Capital Economics addressed concerns that home price increases, which are rising twice as fast as gains in income and residential rent, are not sustainable in the long run. “[T]here are several reasons to think that emerging concerns about the next bubble in US housing are premature,” economist Ed Stansfield wrote in a Capital Economics report. One argument the firm made is housing actually has more to gain than lose from rapid price gains since it would help more homeowners rise out of negative equity and help those with low equity. “This could boost mortgage demand and the supply of existing homes on the market, in time helping to cool the pace of house price gains,” the report stated.
The firm also reasoned that when considering the 35 percent peak-to-trough drop between early 2006 and late 2011, housing actually appears “significantly” undervalued. Thus, even if home prices were to rise by 8 percent each year and incomes by 4 percent, the firm estimates housing would still not be back at its “fair value” until 2018. “That is hard to reconcile with talk of a bubble which implies that prices have become fatally detached from their fundamental drivers,” the firm stated.
Redfin also agreed there is no bubble, but agents of the brokerage did express concern a mini bubble may be forming in Washington D.C., San Francisco, Los Angeles, and to a lesser extent in San Diego. Redfin noted prices in San Diego have not “shot up” as much.
Since rapid gains in home prices in comparison to incomes is one sign of a bubble, Redfin compared the two factors using the Case-Shiller home price index and data from the Bureau of Economic Analysis. According to Redfin, Washington D.C. and Los Angeles have both seen prices rise 26 percent faster than incomes since January 2000.
In San Francisco and San Diego, prices have risen 12 percent and 13 percent faster than incomes since that same time. Redfin also noted that in one of its surveys, 58 percent of buyers in D.C. and 62 percent in Los Angeles said “low interest rates” were one reason they were buying now.
Since this low interest rate environment won’t last forever and homebuilders are adding a fresh supply of homes to the market, Redfin suspects inventory will increase and demand should eventually go down. Even if certain markets appear to be forming a mini bubble, Redfin doesn’t expect to see a repeat of the 2008 crash since many potential buyers are not able to get approved for financing.
According to the brokerage, the “frenzy” seen today is investor-driven, with 46 percent of sales all-cash buys and only 6 percent of sales bought with zero-down loans in the first quarter of this year. In the first quarter of 2006, 26 percent of homes were bought with zero-down loans, and many of those homes ended up as foreclosures or short sales, Redfin noted.
by Esther Cho