No Housing Bubble

TWO REASONS WHY THE RECENT UPTICK IN HOUSE PRICES IS NOT A BUBBLE

The last time house prices went up considerably, they plummeted 30% from their peak in 2006.  Are we gearing up for a similar decline in light of the recent uptick in house prices?  Apparently not, according to a study recently conducted by the Federal Reserve Bank of San Francisco (click here to view the full study).  Here’s why:

1 – House prices are much more affordable compared to rents than they were during 2005-2006.  In those days, it was actually more affordable to rent vs. buy in most markets.  The red line in the chart illustrates how the price-to-rent ratio today is about 25% lower than it’s peak in 2006.  This is partly because rents have gone up in recent years, which provides some “fundamental justification for the upward price movement” in house prices.

2 – Homebuyers today owe less on their mortgages as compared to their income than homebuyers during 2005-2006.  In those days, the mortgage-debt-to-income ratio was much higher than normal, and that’s what fueled the bubble.  The blue line in the chart reached an all-time high in 2007, and has been steadily declining ever since.  Today, the growth in house prices is not being fueled by over-leverage.  It’s being fueled by new household formation and lack of housing supply.

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Author: Joe Farro

We have created a unique process to evaluate your mortgage needs and assist you in determining the right mortgage. Our Home Express Mortgage Plan is the answer to your home loan needs. This blog discusses the many topics surrounding mortgages and the housing market.

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