Are We in a Housing Bubble?

If you’re among our clients at VALoansMN who’ve thought of purchasing a home you may also be among those suffering from sticker shock. Home prices have accelerated at an alarming rate. Is it another real estate bubble? What is driving this increase in housing prices? There are several key factors at work and we at VALoansMN have looked at several.

First, we have to acknowledge the economic laws of supply and demand. When demand is greater than supply home prices are pushed upward. We have to go a bit deeper into this equation to get a better understanding.

Second on our list of factors is the lack of supply. Why aren’t there more houses on the market? A recent Housing Market Index (HMI) report sheds some light on this issue. HMI is the result of a survey of national home builders and they tell us there are serious building material shortages resulting in fewer new homes being built.

According to builders the number one shortage of materials is appliances. 95% of builders say there is a shortage of appliances. Most say it’s a serious shortage. Next is framing lumber. 94% of the nation’s builders say they can’t get enough framing lumber and because of this demand prices for lumber are through the roof. Our third material shortage say the builder is Oriented Strand Board. That’s an engineered wood product used in sheets. 92% of builders report there’s a short supply of this needed material. The list continues with shortages of Plywood, windows and doors, trusses, copper wiring, plumbing fixtures and more.

These shortages have resulted in some of our housing shortage. But, while we see a home building shortage we don’t see a corresponding shortage of demand. The result reflects back on our original economic treated stated in paragraph number 2 above. Housing prices are accelerating due to a strong demand and a shortage of houses for sale. 

Is it a bubble? There is no indication we are repeating what occurred in 2007-8 when housing prices collapsed. That was primarily driven by faulty policies foisted on lenders by the federal government. Remember liars loans? The good intentions of federal policy makers encouraged lenders to make loans available to almost anyone despite their financial well-being. So, the short answer is: we see no similarities between recent real estate bubbles and what’s happening today with housing prices.