With housing prices appreciating at levels that far surpass historical norms, some are concerned that the market is heading for another bubble. To alleviate that fear, we need to look back at the reasons that caused the bubble ten years ago. Last decade, demand for housing was incorrectly propped up because mortgage lending requirements were too lenient. People that were not qualified to purchase were able to obtain a mortgage anyway, causing prices to skyrocket. This increase in demand caused homebuilders in many markets to overbuild. Eventually, the surplus in new construction and the flooding of the market with distressed properties (foreclosures and short sales) led to the housing crash.
Where the Market is Today
1. If we look at lending requirements based on the Mortgage Credit Availability Index released monthly by the Mortgage Bankers Association, we can see that, though requirements have become more reasonable over the last few years, they are nowhere near where they were in the early 2000s.
2. If we look at new construction in Hawaii, we can see that builders are not over building. Average annual housing starts in the first quarter of this year were not only below numbers recorded in 2002-2006, they are below starts going all the way back to 1980.
3. If we look at home prices, most homes haven’t yet returned to prices seen a decade ago. Trulia just released a report that explained:
“When it comes to the value of individual homes, the U.S. housing market has yet to recover. In fact, only 34.2% of homes nationally have seen their value surpass their pre-recession peak.”
Mortgage lending requirements are appropriate, new construction is below what is necessary, and home prices haven’t yet recovered. It appears fear of a housing bubble may be slightly over-exaggerated.