It’s starting to look a lot like 2006. Low interest rates, high buyer demand, and rising home prices. On the surface it may appear that another “bubble” is forming. However, a closer look at some fundamentals tell a different story.
Supply & Demand:
Supply is low and demand is high. There is roughly only 25
days of inventory available, as opposed to 47 a year ago. Strong demand keeps pressure on home prices. Though the pace of appreciation may fluctuate (or slow down) with changing supply levels, it won’t likely go negative anytime soon.
The lending practices that precipitated the “mortgage meltdown” have been eliminated. Loan qualifications are back to relying on proven income and assets rather than the subprime loans that targeted the less qualified borrowers. There are also fewer adjustable rate mortgages (ARMs) making rising interest rates less of a concern.
The amount of mortgage debt as a percentage of the home’s value is lower now than in 2006. This is the result of a higher percentage of homes being paid in cash or very high down payments. As home value appreciates, the debt ratio goes even further down, which brings greater security to the mortgage.
Then vs. Now:
One of the biggest factors leading to the mortgage crises in 2007 was unqualified borrowers being over leveraged with interest sensitive loans. When interest rates went up, borrowers defaulted which led to a lot of homes being released back into the market. This glut of supply sent home prices tumbling leaving many borrowers owing more than their home was worth. Time will only tell if the current market is forming a bubble. For now, I’m not worried because things look a lot better now than in 2006.