Overvalued homes creating tiny bubbles
Recent data indicates that housing markets may be overvalued. According to CoreLogic when looked at nationally home prices rose 7% in September compared to September of last year. This means that 25 of the top 50 housing markets are considered overvalued. Housing prices have been rising about twice as fast as the historical average over the past five years, according to Freddie Mac. “Overvalued” doesn’t necessarily mean anything bad as long as market conditions are right. Sustaining those market conditions is the hard part.
Low inventory is clearly the culprit behind the rising home prices if you are looking to place blame. But it may also be the reason not to fear the dreaded housing bubble. Right now the U.S. economy is good and mortgage interest rates are low. As long as housing inventory remains low, minor changes in the economy or increases in interest rates shouldn’t impact home prices dramatically – no bursting of the “bubble.”
“Overvalued” means that current home prices are 10% higher than what is considered sustainable over the long term. There are several factors in determining sustainability. It basically means that there are not enough people making enough money that can afford the homes in the market. If inventory remains low, the economy stays healthy, and rates remain low it is a little early to start seeing bubbles. But with every month that home prices increase we need to be more on the lookout for that breaking point. Those first “tiny bubbles” will likely appear regionally or locally rather than nationally.
But low inventory might mean we avoid that bursting of a bubble. A sustained period of low inventory with other healthy market conditions will likely result in a flattening of home prices at first, possibly allowing incomes to catch up, increasing affordability and sustaining the market or at worst, a gradual decrease in home prices that matches up with affordability and demand. Through the end of the year, it looks like the only “tiny bubbles”will be from that 80 year old ukulele wielding aunt, with a thing for Don Ho. That you can’t escape running into over the holidays.