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 considerations I want to point out that persuade us to believe that real estate bubble is not occurring.
A real estate bubble, as most of us may already be familiar, is a period of time in which housing prices are temporarily inflated and then crash to lower prices—their actual prices. You will notice right away that this claim is a retrospective one: there needs to be a peak in values followed by a decline in values—an analysis made over time. 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).
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. They want to buy sooner to avoid paying a future premium. They don’t want to “get into it too late.” 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 main reason why we do not have a housing bubble comes from the fact that our buyers are actually qualified to buy these homes. Lending laws are very strict. Only those with low debt to income ratios and sufficient down payment can buy homes. This means that after they buy the home, it is expected, ceteris paribus, that they can continue to afford the payments. Qualified buyers default on payments less often than the unqualified buyer.
The 2007 housing bubble and mortgage meltdown was fueled by unqualified buyers defaulting on payments, causing a massive influx of foreclosed houses to appear on the market as bank owned properties. If we replace unqualified buyers with qualified ones, we find that a large amount of inventory will not flood the market anytime soon.
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 the possibility of mortgage payment defaults.