No Bubble in This Market

Yet another news story says home prices in nearly every major city have hit record highs, but this cycle is not raising concerns about a bubble since conditions are driven by a shortage of supply and high demand, not by subprime mortgages and the collapse of credit.

“This market is rooted in much different (and far less dangerous) fundamentals,” Robert Kavcic, senior economist at BMO Capital Markets, wrote in a research note. The last housing bubble was driven by the subprime mortgage boom, but regulations imposed since then mean that lenders must ensure a borrower’s ability to pay back any loan they receive. Instead, this time home prices are rising because of the short supply of homes for sale across the country, which is increasing competition for properties amid high levels of demand.

A report from title insurance company First American Financial Corp. FAF, -1.01% found that when home prices are taken into consideration with other factors, home-buying power remains strong — at least compared to the 2006 bubble.

“In July, housing affordability continued its decline as year-over-year nominal house price appreciation reached a record 20%, vastly outpacing the increase in house-buying power compared with a year ago,” Mark Fleming, chief economist at First American, said in the report. Nominal home prices are around 35% higher than the previous peak from 2006, Fleming said, but when adjusted for factors such as income and mortgage rates prices are around 38% lower than they were around 15 years ago.

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