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Nervous about rising home values or just blowing bubbles

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Since I’m a mortgage banker, people are asking me more and more if we are in a housing bubble.

Values have risen sharply over the last six years, but it’s hard for me to see that we are in a bubble.

The actions that led to the dramatic rise in home values leading up to the financial crisis of 2008 were born of greed and the lust for easy money. Today’s rise in home values, while dramatic, are based more on sound economic principles: high demand, low supply. This is a much safer place to be than where we were prior to 2008: high demand, high supply.

Prior to the crash, sellers were asking ridiculous prices for their homes. And they got away with it because banks made it easy for buyers by giving ridiculous loans. Values soared and a bubble ensued. Today’s market is very different.

Investopedia defines a housing bubble as “a run-up in housing prices fueled by demand, speculation and exuberance.”

In today’s market, the demand is there, but I’m not so sure about the speculation and exuberance.

Speculation infers that houses are being overvalued without firm evidence. Today’s appraisal industry is on a much more firm footing than it was pre-2008.

Each appraisal today gets reviewed by a Fannie Mae system to make sure they are based on legitimate comparable sales.

Values are based not on what at least one person is willing to pay, but on what others have paid for similar homes near each appraised property.

As for the exuberance part, I’m not really seeing that either. Sure, most people who have a pulse get excited when they buy a home.

But exuberance infers frivolity. To buy a house under $400,000 these days requires grit determination. Inventory is as low as it has ever been in the metro area in that market. And those who want houses in that price-range are fighting off multiple bidders to win the deals.

If you go over $500,000, however, you see the opposite. It’s a buyer’s market. There could be some vulnerability there should the bottom of the economy fall out.

And there are some signs of an impending tightening. My favorite economist, Greg Ip of the Wall Street Journal, just last week wrote an article hinting that winter is probably coming.

In short, he said certain factors are in today’s economy: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. These were all characteristics of run-ups to past recessions.

When the economy tanked in 2008, there was a huge glut of homes on the market here in Atlanta. Everyone was a builder. There were thousands of homes for sale and thousands under construction.

If you lost your job and needed to get out from under your mortgage payment by selling your home, you had to compete against thousands of other homes that were for sale. Inventory levels were unhealthily high.

Today, they are unhealthily low in most markets. And that isn’t going to change any time too soon.

While more than 40,000 permits were issued in the metro area last year, more than 90,000 people moved into the metro area, according to the U.S. Census Bureau.

If a recession came and demand for homes dried up, inventory levels would have a long way to go before we got to a place where there were too many homes on the market. That is at least true for the under-$400,000 market.

The above $500,000 market is a different story. When people lose their jobs and need to sell their homes, they downsize.

The over-$500,000 range already has too much inventory. If a recession arose, you might see those homeowners try to sell. And you would see demand increase for the under-$400,000 market where inventory is already historically low.

I’m getting way too theoretical, but in this scenario, you might encounter a situation where under $400,000 homes actually rise in value during the next recession.

It’s really hard to say what would actually happen, especially for a hobbyist economist like me. One thing I do know: You can only control what you can control. While thinking about this kind of stuff might make us feel smart, it doesn’t change the fact that there’s always good work to do right here in front of us.

“Do what you must do, and do it well.”


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