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Housing Bubble? What the Experts Are Saying

June 14, 2013

Some real estate markets are experiencing rapidly rising prices, bidding wars and scarcity of inventory. These facts have led some to become concerned: Is there another housing bubble on the horizon? Right now, the prevailing opinion among experts appears to be no.

In the peak of the housing market in 2006, home prices were 37% overvalued, based on their fundamentals. When the bottom dropped out, prices dropped dramatically and were 15% undervalued in 2011. Today, homes nationally are still 7% undervalued even with rising prices, according to Trulia’s research. Those figures indicate that housing is rebounding, but still well below it’s high.

“Home prices fell so much after the last bubble burst that they still remain below normal levels even as prices rise sharply today,” said Jed Kolko, Trulia’s chief economist. “Several forces are waiting in the wings that should slow down today’s rapid price gains before they rise into bubble territory again. More inventory, higher mortgage rates, and fading investor activity would each take home-price gains down a notch.”

Builders around the country echo these sentiments, too. According to Ara Hovnanian, chief executive officer of K. Hovnanian Enterprises, a large national homebuilder, he lists two additional factors that argue against a housing bubble: affordability and inventory. Today, with lower home prices and very low mortgage rates, the typical family earns almost double what it needs to afford a home!

In addition, new home construction is still at an all time low, with just 535,000 homes started in 2012 compared to the typical number of about one million that’s been steady since World War II. Inventory is still relatively low, but expected to grow in 2013.

Sources: Trulia, WSJ Blog

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