Housing Bubble Coming?

Floating House
Are we in a housing bubble?

Is the housing bubble about to pop?

Are we in a housing bubble?

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Housing bubble coming?  It is probably one of the biggest questions in everyone’s mind for quite some time.  Are we in one?  Will the bubble pop?  When?  Time will tell.

California has set new records for home prices.  Housing prices have had double digit increases in many areas of the state over the past 2 years.  The median home price is hovering around $780,000.  Is another housing bubble coming that will pop like it did back in 2008?

Home price growth has certainly accelerated over the past couple of years and home sales have taken a tremendous toll on housing inventory. Current home prices increases can be explained by 3 factors:

  1. inflation
  2. falling interest rates
  3. income growth.

California home price history

California Home Price History

Since the end of the 1980s, home prices in California have more than tripled.  In the 1980’s it was less than $200,000 for the typical single-family home.  Interest rates during that time exceeded 10%.  Interest rates today are much less.  This reduces the monthly burden for would-be homebuyers, allowing them to qualify for and borrow more money from the bank.  Converting home prices into monthly mortgage payments, California is still more than 10% below its 2006 peak.

increasing prices

Inflation

General inflation has increased both incomes and the cost of goods and services in California.  According to the California Consumer Price Index (CPI), used to calculate increases in annual property tax bills under Proposition 13, prices have increased by more than 120% since the late 1980s.  Converting monthly mortgage payments to inflation-adjusted monthly mortgage payments allows us to compare mortgage payments from previous eras on an apples-to-apples basis (as if prices had been in constant $2020 all along).  This adjustment, to what economists call “real” terms, shows that mortgage payments are 33% below their all-time highs from 2007 (around the last housing bubble).  Mortgage payments are even 10% below where they were at the end of the 1980s!

Affordable Housing

Housing Affordability

Fewer households in California can afford the median priced home in the state because it has grown more unequal over time.  After considering interest rates, incomes, and overall inflation, mortgage payments on the median-priced home are not consuming larger shares of the incomes of those buying homes than is typical for California’s past.

Cost of California Homes

California costs more to own a home relative to other states and prices are elevated relative to where they would be in a perfectly clearing market environment with no supply constraints.  However, the price premium above that clearing price was only slightly higher than the pre-2000 average that has persisted in California for decades.  Indeed, that premium is less than one-fifth the size that it was during 2007 when prices were more than double their market-clearing price.
That does not mean that the probability of prices softening in California does not exist.  Recent price and rate increases make softer growth in the future more likely.  The California Association of Realtor’s forecast reflects those challenges.  The downside risk of another housing bubble is much smaller in magnitude than it was during the last cycle.

Housing Bubble Summary

Lack of inventory and strong buyer demand point to continued appreciation/home price growth for the foreseeable future.  Based on the law of supply and demand, it does not look like the housing bubble will pop any time soon.  Homebuyers should always purchase homes with their eyes wide open about both the potential risks of short-run market fluctuations and the long-term benefits of homeownership.

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It isn’t 2008 all over again, just make sure the deal makes sense for your own personal economy.

Information based on current San Diego County HomeDex stats – here.  Some material taken from an article from May 2021 – COPYRIGHT © CALIFORNIA ASSOCIATION OF REALTORS®