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.