Expensive Housing, but Not Bubble

A few US metropolitan areas are witnessing record high prices. It is no wonder that quite a few house flippers are afraid of a repeat 2005. However, things are much better than what many people think. Industry observers believe that residential real estate cannot be included in any speculative bubble. The principal reason forhigh real estate prices, according to industry workers, is the low inventory of available homes. Such high prices will eventually roll back when new homes are added to the property pool. Fewer number of buyers will also result in price decrease. The basic issues which resulted in the housing collapse a decade before are absent now.

Variety of factors

According to Jonathan Smoke of Realtor.com, the madness of the last cycle was due to the result of a mix of constructing a glut of homes and a lot of speculation due to loose credit. This condition does not exist at all in the present scenario.

To lend credence to his claims, Smoke created an index dependent on six factors. All factors, according to him, are crucial to the 2000s era housing boom and subsequent bust. The list of factors include price appreciation, the incidence of house flipping and the share of those buyers who utilized mortgage financing. Other factors are the price to rent, the price to income and the housing begins to the household formation. After this was done, the index was benchmarked to 2001. It was a year when housing market was fairly valued.

Cause of high prices

In 2015, only six metro territories exceeded by 10 percent, the available benchmark. The highest in this list was San Jose, at about 19 percent over 2001 levels. Bubble pricing was seen in 29 cities in 2005. It is unsurprising that the most apparently bubbly local markets are those where the population grows much quicker than housing supply. These includes cities in California where strict zoning laws have slowed down or halted altogether any new construction. The phenomena is also being observed in Texas martkets where an increase in labor and land costs, along with recessionary aftershocks, has restricted housing development activities. In the meantime, the percentage of American households, whose rent is at their 50 year peak, is helping to ramp up the rental prices. This also provides investors all over the US the incentive to buy up the homes put into market. Smoke further added that prices in the Bay area of San Francisco and Austin cannot be sustained.

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