This Is No Housing Bubble; Home Prices Are Rising For Real

With home prices heating up again, many are asking if the housing market is heading for another bubble… and by historical extension, another collapse.

The answer is a resounding and resolute “NO.” And this is not just a nationwide trend… it’s germane to San Mateo County as is the slow return of first-time home buyers to the market.

Home prices are rising at a more rapid pace than they have in months. Why? Well duh, demand is outpacing supply… just as it always has in No Growth-infested San Mateo County. According to the National Association of REALTORS®, existing home sales surged 9 percent over March 2014 stats and home prices were up 8 percent over last year as well.

What’s more, with tight inventories plaguing many markets (San Mateo County being no exception), the median list price in March climbed 11 percent over last year, according to realtor.com®.

Jonathan Smoke, realtor.com®’s chief economist noted, “During the peak years of the housing bubble, from 2003 to 2005, the data on supply versus price appreciation looked very similar to what we are seeing now. But there are key differences, which is why on the national level, this is no bubble.”

Smoke says these home price increases will stick because the market is correcting for severe price declines in the past. Prices rose 7 percent and 12 percent in 2012 and 2013, respectively. Median prices have climbed less than 8 percent on a compounded annual basis over the past three years. On the other hand, from 2002 to 2005, median prices rose 10 percent on a compounded annual basis with no justification of a bounce from a prior decline.

“On an inflation-adjusted basis, the national housing market is 30 percent beneath the peak set in 2005,” Smoke noted. “What’s more, relative to rents or incomes, median home prices are not ‘unhinged’ from long-term averages.”

In 2005, the price-to-rent ratio was 35 percent higher. Currently, the price-to-income ratio is where it was in 2001 and it is about 30 percent below where it was in 2005.

And recall, during the housing bubble, mortgage financing saw rapid expansion, and flipping activity based on speculative investing soared - neither of which are occurring now. Which is why today’s higher prices were somewhat anticipated as the economy improves and first-time buyers gradually return to the market. Eventually, these higher prices will encourage more owners to list their homes and builders to start construction on new housing, creating the A-to-B-to-C phenomenon which is the historic movement of a healthy housing market.

This assumes, however, that the our elected leaders have the political will to approve actions which increase the supply of affordable housing (as opposed to loser propositions like rent control) in the face of the ever mutating NIMBY/‘Coastie’/No Growth/Enviro crowd.

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