Are we headed for another housing bubble

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I’m often asked by clients, “Are we headed for another housing bubble?”

The simple answer is “…my crystal ball is broken and if I were that good at predicting the future, you’d be calling me at my beach front house in Kona…”

On the other hand, there are clues that give us some idea.  Recent research by Realtor.com examined certain red flags that caused the housing crisis that came to full power in 2008 and compared these same indicators for today’s real estate market.  Let’s take a look at four of these red flags

  1. Price to rent ratio
  2. Price to income ratio
  3. Mortgage transactions
  4. House flipping volume

All four of these indicators were outside historic norms in 2005.  Home prices were way above normal ratios when compared to rents and incomes at that time

They explained that mortgage transactions as a  percentage of all home sales were also at a higher percentage

“Loose credit was one of the main culprits of the housing crisis.  Mortgage lending expanded dramatically as unhealthy speculation reached its peak and was met by the highest level of credit availability as measured by the Mortgage Bankers Association.  The index measures the overall mortgage credit condition by the share of home sales financed by mortgages.  This metric does not capture credit quality, but it does set a view of the importance of financing in supporting the housing market”

House flipping was rampant beginning in 2005 and lasted for a couple of years.  As realtor.com’s research pointed out:

“Heightened flipping activity is a clear indication of speculation in the real estate market.  A property is considered as a speculative flip if the property is sold twice within 12 months and with positive profit.  Flipping is a normal part of a healthy housing market.  In an inflated market, expectations about short term profit from pure price appreciation are very high; therefore, the level of flipping activity would show evidence of being heightened”

Here are the categories with the percentages reflecting the unrealistic rations and numbers of 2005 as compared to the current NATIONAL market.  Remember a negative percentage reflects a positive gain for the market.  (Data: Realtor.com)

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Bottom Line:  With hindsight being 20/20 … experts today are keeping a close watch on the potential red flags that went unnoticed in 2005.  Keep checking in to this blog site for updates to the market.  If you have any questions, use the CONTACT popup on the bottom right of this page


 




 


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