What is a Housing Bubble?

Discussions of the past and possible future housing bubble have been all over the real estate news for a while now. We all know that the recession of 2007-2009 was caused primarily by a housing bubble that burst in 2008. But what exactly is a housing bubble?

It’s not just a rise it prices. It’s a market condition created by excessive home buying that runs up prices based solely on the expectation that the prices will continue to rise. However, eventually homes become too overpriced for buyers to keep up, the bubble pops and housing prices plummet.

Shaky lending practices are another factor that led to the financial crisis and the spike in prices during our last housing bubble. Crucial players in the bubble, lenders with poor underwriting standards helped unqualified buyers purchase home loans they couldn’t afford to pay back.

Recently, some critics have been questioning whether the U.S. could return to a crisis like the one in 2008 because real estate values have been rising according to data from the National Association of Realtors®.

The median existing single-family home price increased in 93% of markets with the national median existing single-family home price in the second quarter reaching $229,400, up 8.2% from the second quarter of 2014 ($212,000).

So, do we have anything to worry about?

Not really according to Nick Timiroas at the Wall Street Journal. In a recent article on rising home prices, he explained that although median home prices this June hit a record high since 2006 at the peak of the bubble, he pointed out, all else equal, median home prices should set “new records” every summer as long as there is inflation.His conclusion on the matter is that “Crude comparisons of nominal home prices with their 2006 and 2007 levels shouldn’t be used to make cavalier claims about a new bubble.”

Though home values are continuing to appreciate, the rate of increase reflects that of a healthy housing market. Check out this chart from KCM that shows the year-over-year appreciation since January 2014.

With the steady and healthy increase in prices and new, stricter underwriting standards for home loans, we don’t have to fear another housing bubble.

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