Is There a Housing Bubble?

“What is going to happen to the value of my home?” is the question on the minds of homeowners these days.   Forecasting the future is the most dangerous profession I know of but there are variables we can consider to get a better grasp what might happen.

Average home values in most sections of the country increased significantly again last year. Most areas show evidence of strong markets. Some pundits say that this increase is a bubble and it will burst because the rate of increase in housing values across the nation cannot exceeds the core rate of inflation for too long.   Indeed, Silicon Valley has seen declines on the order of 10 percent which followed the insane run up in values during the dot-com era. Can that happen in your area?

My view is that it will not. First of all, we love to worry about something and the press likes to talk about things that worry people. I would hope to put your worries about housing values at rest.  

Housing has appreciated faster than inflation for most of the last century. Major declines in value are invariably accompanied by a crisis in other economic sectors that spills over into the real estate sector.   20 years ago falling oil prices depressed real estate values in the Oil Patch states. Ten years ago the decline in Southern California was exacerbated by the loss of over 300,000 aerospace jobs, the crash of the greatly over-built commercial real estate market, and interest rates that were almost twice what they are today.  

At this point in time demand for housing still looks good as we continue increase jobs at a faster rate than we are building homes. Job growth is not dramatic anywhere, but it is positive.   Homebuyers are buying homes with real money supported by real income from real companies, not based upon the phantom value of stock options.

Remember that people who are buying homes at any level have sold a home in the level below that one.   Ultimately, activity at the high end is built on a foundation established at the entry level. Housing affordability has been enhanced by extraordinary low interest rates and Automated Underwriting that is approving loans to people with higher debt ratios.   Another factor that spurs activity is the favorable tax treatment of the gain on the sale of a personal residence.

There is no likelihood that the interest rate party will be over anytime soon.   Even if the stock market rebounds faster than most people anticipate, rates will increase somewhat but probably not enough to affect housing affordability.

Consequently, I would not worry about the bubble. We’re likely to continue to see increases in value this year and next. But I would also not mortgage all the recently built-up equity either.   We live in a cyclic world and you want to have equity as a cushion. So don’t worry about this, and try not to worry about anything else either.