Odds are there is no housing bubble

Posted by on August 10th, 2017

In the post-crisis era, it can be hard to believe there’s no negative outcome lurking behind today’s soaring housing prices.

But new analysis of data from 14 developed countries shows there’s minimal risk of a dramatic decline in home prices any time soon, despite current fears of a “bubble-bursting” correction.

The research comes as housing prices set new records nationwide, surpassing their 2006 peaks in almost all areas of the country.

The median house price jumped 6.5 percent in June to an all-time high of $263,800 – the 64th straight month of year-over-year price increases.

But the study showed sustained increases in real house prices have been the norm since 1950, rather than the exception. While there is always a chance of a correction, odds are it won’t happen.

Simple models put the chance of a 20 percent (or more) decline in real prices within the next five years at about 10 percent.

After the 2007 Crash, many homeowners saw their homes plummet in value, hamstringing millions with upside-down properties, and sending many others into foreclosure.

The run-up to today’s record home prices seems all too familiar. Millennials who grew up watching the devastating effects of the Crisis are especially concerned about buying at peak pricing just before the bottom falls out again.

Remarkably, surveys show more than half of current homeowners think houses in their area are overvalued and current prices are unsustainable.

But market analysts say this price surge isn’t like the one that resulted from a Pre-Crisis free-for-all.

On the contrary, it’s all about market fundamentals: Price increases result when rising incomes encounter supply constraints in desirable areas. Fewer potential buyers or a flood of houses hitting the market will cool prices, but not reverse them.

Government and industry protections installed after the Housing Crash should ensure standards allow only the most credit-worthy can take out mortgage loans.