In the last five years, home prices across the country have been increasing by leap and bounds. According to the Economist, a 17% increase has been witnessed in the last three years alone. The rising prices have raised concern among some speculators and analysts that we might be headed for a housing bubble.
“Should we then be worried of the home market crash?” the answer is no. Unlike the previous housing boom, which was encouraged by a lenient lending system, the rise in home values today is as a result of the forces of demand and supply. Simply put, there are many buyers on the market than there are sellers.
According to a home sales report by the National Association of Realtors, the constrained housing supply is as a result of low inventory levels. The report indicates a four-month supply of inventory which means a less than four month period for all current listings to be sold.
According to FRS Economic Research, one of the reasons why homeowners are not willing to put their homes on the market is the probability that they are worth less than their mortgage. As the housing prices continue to soar, homeowners are holding on their properties with an expectation that they will recover their lost equity and reap a profit.
With this optimism, many investors are buying more homes than they are selling. The rising demand for houses and the diminishing supply will continue pushing the prices up. For home buyers, there is no better time to buy than now.
How different was the 2006 bubble?
In the 2006 housing bubble, the rise in demand for houses was fueled by the availability of subprime credit. The availability of this type of financing increased the demand and supply of houses up to a point where the default rate on mortgages led to a decline in property values.
Today, stringent measures have been put in place to prevent artificial demand and supply. The appreciation in housing prices is as a result of natural forces, as the current lending standards are nowhere those of 2008. This is shown in the mortgage credit availability index which shows the lending patterns from June 2004 to January 2016.
In the graph, it is evident that since June 2008, lending standards have been improved to avoid artificial demand and supply. The current increase in housing prices is as a result of demand from qualified buyers and diminishing supply from homeowners and investors looking to build more equity on their homes.
With many homeowners not willing to sell their property, the housing prices are expected to keep rising in the coming years. For home buyers, this is the best time to buy. As the house prices continue to rise faster than the mortgage rates, homeowners will continue holding their property.
The few homes that are available for sale today may seem expensive but with the current rate of value appreciation, things may look different in days to come. If you are looking to buy a home, act now.