Home prices have hit record highs in some major U.S. metropolitan areas, and house-flippers are behaving like it’s 2005: It’s no wonder people are chattering about another housing bubble.
But residential real estate isn’t in a speculative bubble, industry observers contend. Instead, a low inventory of available homes is driving prices higher — prices, however, will eventually recede as buyers throw up their hands, or as more new homes come on line. The structural issues that led to the housing collapse last decade aren’t present.
“The havoc during the last cycle was the result of building too many homes and of speculation fueled by loose credit,” said Jonathan Smoke, chief economist at Realtor.com. “That’s the exact opposite of what we have today.”
To illustrate his point, Smoke compiled an index based on six factors he deemed crucial to the housing boom and bust of the mid-2000s, including price appreciation, the prevalence of house-flipping, and share of buyers who used mortgage financing. (The other factors are price-to-income, price-to-rent, and housing starts-to-household formation.) Then he benchmarked the index to 2001, a year when the housing market was fairly valued.
Last year, only six metro areas exceeded the benchmark by 10%, with San Jose coming in highest, at 19% above 2001 levels. In 2005, there were 29 cities that were at least that bubbly, as the chart below shows: