Is A New Price Bubble On The Way?

According to Wikipedia, a price bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It can be identified through rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline.

Perhaps the best example of this is the housing bubble that occurred from 2000-2006, with the bubble bursting between 2008-2010. While certain markets were hit harder than others, no community escaped unscathed.

With current housing prices inching closer to 2005 levels, and several states reaching new historic highs, the question arises: Is a new price bubble on the way?

Regional economies will drive price increases, based largely on job growth. Trulia’s Bubble Watch reported in January of this year that even in economies with stronger job creation, housing markets are still undervalued between 2-5%.

In April, National Association of Realtors Chief Economist Lawrence Yun compared 2015 to the situation in 2005. He stated that while income is up only 2% and is not matching that of rising home prices, there are a few differences in the current market.

First, demand is lower in both new and existing home sales. But supply is also lower with no over supply at the moment. Second, there are more stringent lending guidelines and many more all cash transactions.

Yun states that pressure is starting to build and the key to relieving this pressure is to bring more supply to the market, including more active home building. But, this certainly does not indicate a case like 2005.

In addition, according to CNN Money, today’s rising prices are fueled by actual market forces, backed up by real money. It’s a better qualified marketplace and we aren’t seeing all those things that would create unsustainable demand.

So for now it seems we are avoiding a replay of the beginning of this century.