Many media sources have begun to discuss a real estate bubble is on its way– that housing prices here in the bay area have climbed too rapidly and that we are being setup for another disaster. While it may be plausible, there are also other empirical facts that I want to point out that say that a real estate bubble is not just true.
A real estate bubble, as most of us may already be familiar, is a period of time in which housing prices are temporarily inflated. You will notice right away that this claim is a retrospective one: one that requires commentators to first experience a peak in values followed by a decline in values. As I’m writing this now, there is not yet any sign of price decline, so it’s fair to say that either we have not reached a peak (evidence for a bubble) or we have not yet reached a stabilizing threshold (evidence against a bubble and evidence for the normal cyclical nature of real estate values).
Whatever the future will be, it is worth suspending judgement on it for now until the summer ends. Many of my clients are closely watching the real estate activity over the summer, wondering if inventory will increase or if they will remain the same.
As things stand, the bay area is suffering from a shortage of inventory and a high demand for homes. Buyers feel pressure from rising prices and rising interest rates and thus they want to buy sooner to avoid paying a future premium. With many buyers fighting over only a few houses, the bids get high rather quickly. Pretty soon, as the media points out, some cities (but not all) have regained their 2008 values.
The following key idea, however, does persuade me towards the thesis that the bubble may just be pure conjecture, but read on and comment to tell me if you agree or disagree: The foundational idea on why we do not have a bubble on our hands comes from the fact that our buyers are actually qualified to buy these homes. Lending laws are strict and only those with low debt to income ratios and sufficient savings can buy homes. This means that after they buy the home, it is expected, ceteris paribus, that they can continue to afford the payments. The consequence of qualified buyers making qualified purchases and making qualified payments while living in their home is that there is some reassurance in the next 5-10 years that there will not be a large deluge of supply/inventory returning to the market due to defaults. This is precisely the consequence of the most recent mortgage meltdown we experienced in 2007 and at least we have the aforethought to not repeat it.
Given this fact– that buyers are qualified– should give us some peace of mind that there may not be a housing bubble in the making. While I could be wrong, it is hard to avoid the fact that we have qualified purchases being made, thus reducing further negative consequences.