Has the U.S. Housing Bubble Returned?

There is much speculation of a second housing bubble. The rumors began as early as July 2012, when home prices accelerated at rates similar to those of the previous housing boom in the late ‘90s and early 2000s. In what the New York Times calls a “violent pricing cycle,” the history of housing bubbles indicates that we may be entering another bubble.

But before we dig into the latest speculation, we first need to establish some context for bubbles in housing. The most recent housing bubble, which sent the economy careening in a tailspin, was fueled by reckless banking behavior in subprime mortgages. These mortgages didn’t require a down payment and allowed many Americans to purchase homes far beyond their financial means. Reckless lending has in large part over-corrected today, with many banks requiring at a minimum very good credit to even qualify for a mortgage.

However, the reason for speculation of a new housing bubble is the constantly rising home prices. Kari Smith of Forbes Magazine explains that when one of the main drivers of a home purchase, like technology, regulation and preference, rises on a large scale, then home prices and rents are driven higher. For example, even though Philadelphia and Dallas have similar median incomes and populations, home prices in Philadelphia are much higher than in Dallas because more people want to live in the Northeast Corridor – a driver of preference.

Bubble vs. Stable Market
A stable housing market in today’s landscape would provide a sharp rise in home prices (what we are currently experiencing) followed by a tapering off of that growth as housing prices are maintained. A bubble in the market will most likely arise when lending standards are lowered, allowing homebuyers to qualify for larger loans and make larger offers, in turn driving home prices upward. “As standards go down, buyers rush in with more buying power and we enter a new bubble phase,” writes Smith in Forbes. “To my knowledge neither the government, the lending industry nor we as a society have done anything that promises to prevent this.”

Much of the speculation stems from today’s ultra-low mortgage rates, which the Fed has been keeping down to spur economic growth. If the Fed eases off its current buying trend, those mortgage rates will begin to rise, creating a bonanza for those home buyers who’ve already locked in a mortgage at today’s record low rates. Home buyers who entered the market at the right time will see home values soar, as inflation and interest rates rise.

What the housing bubble speculation means to potential homebuyers can be distilled to this: now is very good time to buy. With rates as low as they’re ever going to be, investing in a home with a fixed-rate mortgage is a great idea, so long as you plan on settling in that home for the long-term.

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