Photo: Robert Clark
The concern over the US housing market entering another bubble seems logical, with home prices in some US markets exceeding pre-crisis levels and some even “overheating.”
However, a closer look back at the 2008 housing bubble reveals that history is not likely repeating itself just yet, according to a post published last week by the listing site Trulia.
Home prices may be rising, but they are rising in response to historically low levels of inventory and high levels of demand. But if prices were rising after the market was flooded with inventory, that might be the time to worry.
To set your mind at ease, here are five tips for identifying a bubble rising in the housing market:
1. The return of subprime lending
In short, subprime lending is lending to anyone, regardless of how qualified they are. This was widely considered the primary culprit behind the bubble a nearly a decade ago. The vast amount of foreclosures following the crash revealed how risky the practice of lending to borrowers who ultimately could not afford their homes is. And, many of those widespread loose lending practices are either no longer happen or are unpopular.
The rise of “creative” lending is a precursor to the beginnings of a bubble, says Sep Niakan, an agent with HB Roswell Realty in Miami, Florida, in the Trulia post.
2. Unhealthy leverage
In the bubble of 2008, many homes were “leveraged to the hilt,” meaning that you buy with a low down-payment and borrow heavily. The problem with leveraging is that when prices tick downwards, homeowners can find themselves with no equity or even negative equity.
In an environment fostering the formation of a bubble, there is a great deal of leverage happening, says Jonathan Miller, president of the consulting firm Miller Samuel, in the post.
For now, history is not repeating itself here, but Trulia says it is worth keeping an eye on downpayments to see if they begin to shrink.
3. Wage growth falling behind living expenses
Nationally wage growth is lagging behind home prices, causing some housing experts to raise a concerned eyebrow. When living expenses and prices begin to skyrocket while wage growth remains flat, expect to see the beginning of a bubble.
But Trulia notes that at the moment lending is tight which should help keep inflation in check.
Phillip Lang, COO of the New York brokerage Triplemint, says that fast-growing cities like Austin, TX are the first place to look for the next bubble, as these are cities where home prices are accelerating with incredible speed.
4. House flipping becomes the norm
In the years leading up to the crisis in 2008, house flipping was prevalent as was the rise in overnight “investors.” The pattern of “fix and flip” by buyers with high credit scores and a lot of leverage contributed greatly to the previous housing bubble.
This pattern was seen across the country in many markets where prices were skyrocketing, says Trulia.
5. Rising interest rates
Low interest rates help keep homes affordable for more buyers, which in turn supports demand. Rising interest rates scare off many would-be homebuyers, and, as a result, demand falls, says Trulia. A rise of one percentage point can sink demand and end a housing boom.
Presently, interest rates remain at near-historically low levels, despite a few small increases over the last year.
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