Housing Bubble Fears rise with Prices
Sky-rocketing rises in real estate values have left many people worrying if we are in the middle of another housing bubble.
What is a housing bubble?
According to Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania:
“A price bubble is a rise in price based on the expectation that the price will rise. Sooner or later something happens to erode confidence in continued price increases, at which point the bubble bursts and prices drop. What makes it a price bubble is that the cause of the price increase is an expectation that the price will increase, which sooner or later must reverse itself.”
In a recent article, he explained:
“My view is that we are a long way from another house price bubble. Home buyers, lenders, investors and regulators now understand that a nationwide decline in house prices is possible -- because we recently lived through one.”
Where are home prices today?
Though home values are continuing to appreciate, the acceleration of the increases has slowed to year-over-year numbers which reflect a healthy housing market. Here is a chart showing year-over-year appreciation since January of last year:
The Take Away
Nick Timiraos of the Wall Street Journal put it best in a recent tweet:
“Predictions of a new national home price bubble look unfounded for now, according to data.”
