Home Prices Are Rising-Is a New Housing Bubble Forming?

Are Rising Home Prices Creating a New Housing Bubble?

We recently reported that home prices are continuing to rise across most of the nation. This has created concern in some pundits that a new housing bubble, like we saw ten years ago, is forming again. We want to explain why these concerns are unfounded.

The current increase in home values can be easily explained by the theory of supply and demand. Right now, the number of families looking to purchase a home is greater than the supply of homes on the market.

Here is a chart that explains how the months’ supply of housing inventory impacts home values:

According to the latest Existing Home Sales Report from the National Association of Realtors, there is currently a four-month supply of inventory. That puts us in the blue section of the above graphic. Home prices should be appreciating. (As of the date of this post St Louis Metro Area was showing 5.7 months of inventory). These amounts can fluctuate quickly and vary from area to area. Call us at 636-532-4200 for more specifics.

The difference in 2006…

A decade ago, the demand for housing was artificially boosted by lending standards that were far too lenient. Today, the strength of the demand for housing is legitimate, as lending standards are nowhere near what they were a decade ago.

For proof of this, let’s look at a graph of the Mortgage Bankers’ Association’s Mortgage Credit Availability Index:

The higher the number, the easier it was to get a mortgage. We can see that from June 2005 to June 2007, mortgage standards were much more lenient than they have been over the last nine years.

Bottom Line

Today’s price increases, unlike those a decade ago, are the result of qualified buyer demand exceeding the current inventory of homes available for sale. Once the supply increases, prices will level out. If you would like to know more about the St. Louis Housing Market and get empowered with informational tools check out the related articles below.