Yahoo Finance Housing Bubble Ahead? Analysts Don't Think So
Home prices rose again last year, and the housing market is starting off 2017 at a brisk clip.
According to S&P CoreLogic Case-Shiller data, which includes the 20 largest U.S. cities, home prices regained their 2007 peak late last year and increased 5.6 percent from November 2015 to November 2016 -- the latest figure available. Zillow's Home Value Index, which measures median home value nationwide, predicts its index will reach the 2007 level this spring. Zillow found that home values rose 6.8 percent last year and predicts a 3.5 percent uptick this year.
But could these impressive numbers actually be the precursor to a housing bubble?
"I think we can take the bubble off the table," says Nela Richardson, chief economist for the real estate brokerage Redfin, which reported a 7 percent increase in sales prices from January 2016 to January 2017. "Demand is really strong. Inventory is still quite low. The market is really fast. None of that suggests a market that's about to bubble over."
[See: The 25 Most Desirable Places to Live in the U.S. in 2017.]
The continuing rise in home prices is led by basic economic forces: Demand exceeds supply in most cities, especially for entry-level housing. Plus, unemployment is low and wages have begun to increase, both strong economic fundamentals.
"We are absolutely not in a bubble," says Ralph McLaughlin, chief economist for the real estate portal Trulia. "The economic definition of a bubble is when people are driving up prices only because they expect prices to increase."
While economists don't foresee a crash like the one we experienced in 2008, they do expect the increase of home values to slow, and values could even decline slightly in some areas.
"We are due for another recession," McLaughlin says. "When that recession hits, prices are likely to flatten or decline."
The biggest problem for the housing market in most cities is the lack of available homes to buy, especially in the lower price ranges that attract first-time homebuyers. The National Association of Realtors found that the number of homes for sale at the end of January was 7.1 percent lower than the number for sale a year ago, with only 3.6 months of inventory available. Six months of inventory is considered a balanced market.
"We're seeing very strong demand in many housing markets and not a lot of supply," says Svenja Gudell, chief economist for Zillow. "Inventory remains a big issue."
The lack of inventory has made it difficult for those who actually want to secure a home.
"At least in the coastal markets, it's a very competitive market right now," Gudell says. "They might put in five different offers and won't get a home from any of those offers."
Lack of inventory is also discouraging move-up buyers who might otherwise trade in their starter homes for something larger. But people who bought homes a decade ago may still be underwater or not have much equity to put toward a bigger house.
"It makes it more difficult for a household to trade up to the next level," McLaughlin says. "You might just stay put and renovate your existing home."
[Read: Is the Seller's Housing Market Finally Over?]
Another factor reducing inventory is institutional investors who bought up quantities of homes during the foreclosure crisis are holding on to them because high rents make them a good investment. But as home values overtake rents, some of those homes may come to market, McLaughlin says. Rents outpaced home prices in 2014 and 2015, but they are now starting to moderate. "If that keeps pace, we should start to see investors sell their houses," he says.
Housing inventory is also low because new construction continues to lag, particularly construction of starter homes. That's partly because of the high cost of land, but it's also because of a lack of construction workers. Little development activity during the recession caused many construction workers to leave the industry or change their specialization. Anti-immigrant measures could make the labor supply even tighter.
Mortgage rates are expected to rise this year, although rates are likely to fluctuate and likely won't significantly affect demand. "We really don't think interest rates are much cause of concern for homebuyers," McLaughlin says. "It may dampen the rate of appreciation, but we don't think so."
In cities with the highest prices -- San Francisco, Miami, Boston, New York and San Jose, California -- the rate of appreciation on home values has already started to slow, and other cities may follow. "In most parts of the country, housing is still very affordable," McLaughlin says. "In those markets, we don't think affordability is going to dampen price increases at all."
What does this mean if you're thinking of buying or selling? In general, your personal financial situation is still the most important factor. If you have a stable job, expect to live in the same area for at least five years and have money for a down payment, this is probably a good time to buy. If not, you shouldn't let rising prices force you into a hasty decision. "I never think rushing to get a home is a good idea," Gudell says.
[Read: Is Buying a Home Through a Short Sale Ever a Good Idea?]
For sellers, your chance of timing your sale at the exact peak is slim, and when that will be depends on where you live. But if you have reasons to sell your house beyond the strength or weakness of the housing market, now is not a bad time.
"If you're ready, it's probably a good time to sell," Gudell says. "You're not gaining that much by holding on to the house."
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