Boom or bust: Is this the next housing bubble?

Karl Fendelander | Improvement Center Columnist | November 5, 2013

When the housing bubble collapsed, an already unstable economic situation went off the rails. Today, the market is still recovering, and it's doing a great job of it -- almost too great. With home prices up ten percent from 2012, many are crying bubble again, but is this worry well-founded? In inflation-adjusted dollars, housing prices in the U.S. climbed 18.4 percent in the 16 months leading up to July 2013. Comparing this number to the 22.4 percent gain in home prices right before the housing bubble popped isn't exactly settling. What else is growing?

  • The National Association of Realtors reports that this year's rate of existing home sales is 5.39 million per year, up 17 percent from 2012.
  • The U.S. Census Bureau clocks the current annual rate for building permits on single-family homes at 613,000 per year, up considerably from 2009's recent low of 337,000.

In isolation, these two facts might seem like tell-tale signs of an inflating bubble -- but when compared to 2005 numbers, things look a bit different:

  • Existing home sales are indeed up, but they're still 27 percent lower than in 2005.
  • While the number of single-family-home building permits is close to double the post-bubble nadir, it pales in comparison to 2005's 1,798,000 permits.

Interestingly, the markets that are hot right now are exactly those hit hardest by the previous bubble. These markets are also mainly in the West, with 17 of the top 20 west of the Rockies -- and 12 of those in California alone. One of these hard hit markets was Bakersfield, CA, where prices fell over 50 percent from 2006 to 2011 after the housing bubble popped and left thousands of homeowners there underwater. The recent 14 percent rise in home prices is nothing to turn your nose up at, but it still doesn't come close to where things were. If this is a bubble, it's certainly a lackluster one compared to its predecessor.

As with many things, the numbers don't tell the whole story. On a national level, only three percent of existing homes were purchased by major real estate investors, but this number changes quite a bit when we look at some of the hotter markets. In July of 2013 alone, large investors made up 25 percent of Atlanta, GA's and 20 percent of Tampa, FL's home sales. The number of people buying second or third homes for the sole purpose of renting them out has gone up in recent years, but the buying power of investors is much more likely to be artificially driving prices up because average citizens simply can't compete. Will it all end in another bubble-popping disaster? With new regulations making it more difficult for unqualified potential buyers to get a mortgage -- not to mention a high level of lingering trepidation in the market -- the optimistic answer is no, but that doesn't mean we shouldn't all be crossing our fingers. In the meantime, these factors are driving up the demand for rentals and, therefore, the price of renting.

According to a recent Trulia study, it's still less expensive to own a home than it is to rent -- 35 percent cheaper, in fact. Last year it was 45 percent cheaper to buy than rent, and the gap is expected to continue narrowing as mortgage rates rise because of the stabilizing economy. Their calculations include everything from taxes and closing costs to doing regular home maintenance -- and they also include staying in the home you purchased for a full seven years. In short, the lesson here is that buying a home might be a good investment monetarily right now, but it might not, and that could change on a month-to-month basis in the future. If you're buying, it should be a home you love, can afford, and plan to stay in for a long time if you want the investment to be a sound one.