Across the country, average property values have increased by 15.8 percent in the past two years. This has led to a lot of speculation of whether there is now a new bubble in housing. So is there a housing bubble on the horizon? Can you predict what the housing market will do next?
To answer the question, let’s look at current and historic data to speculate the answer. According to the most popular housing price index (the S&P/Case-Shiller HPI) housing is warming up, but that bubble talk is too early. This conclusion was based on a longitudinal survey of homebuyers that Yale University has undertaken annually since 2003. The updated survey suggests that we are not in a bubble.
One sign Shiller says that a bubble isn’t forming right now is strong demand for rental investments. This aspect of the housing market is an indication that we are not now in bubble territory: Some 10.6 percent of respondents said they bought a home “only to rent out to others.” That proportion has been rising irregularly since 2004, when it was just 2.7 percent. The change likely reflects the recent tilt in demand toward rental housing, which isn’t likely to sustain high prices in scattered suburban housing.
Taking into account the abnormally low level of new homes being built over the last several years gives another look at the why prices on the rise. The average number of homes built annual from 1968-2008 was about 1,531,000.
Even during the turbulent times of 16 percent interest rates, the Cuban Missile Crisis, Cold War, and the.com collapse there were 1.5 million homes built. Public fear was high during these times as individuals were building bomb shelters, but still 1.5 million homes were built. However, in the past 4 years everything has changed. By the end of this year only 542,000 homes are predicted to be built. This significant decline of new homes has been one of several factors helping to improve property values.
Another indicator to consider is that home ownership levels have only dropped 2.9 percent since the peak of 2004. Only 2.9 percent! Homeownership has fallen from 69 percent to 66.1 percent due to foreclosures. It’s not as dramatic as everybody thinks. That’s a major movement and a big number but it’s not a double digit percentage drop, it’s only 2.9 percent.
And last consider that Fannie Mae states that 86 percent of 18 to 34 yr olds are considering purchasing a house. Let that number sink in ....86 percent! The vast majority are considering purchasing a house. They are going from mom and dad’s house out into a rental, but they want to buy a house.
Speculating the future housing market based on fear, public or popular opinion is not the strongest foundation to be standing on when looking to make one of most Americans biggest buying decisions. Good news doesn’t always make the best sound bites but looking at up-to-date and historical data can lead to a much more accurate and predictable out come when looking at buying or selling homes. I hope the above information helps to make the decision clearer.
Sheri Aguilar is the president of the Lodi Association of Realtors and can be reached at Sheri@YourLocalAOR.com.