With the recent real estate bubble still fresh in our memories, it’s a frightening idea to think about it happening again. Many circumstances in the current real estate market are similar to the situation right before the bubble burst around 2008. House prices seem to be rising again at an alarming pace, even exceeding price levels from before the crisis.
Is the fear for a new real estate bubble really justified though?
What causes a real estate bubble?
To be able to make predictions on a real estate bubble happening again, it’s good to understand what caused the previous one. A real estate bubble is basically a rise in house prices, based on the expectation of future price growth. It doesn’t have anything to do with actual value of a property and that’s what makes it so dangerous.
It is good to realize though that a price bubble is an extreme rare event that basically happens only once in a lifetime.
Current situation
House prices are currently almost back to the point they were at when the bubble period started. What’s similar in today’s real estate market, when compared to the bubble period, is that the demand for houses is rising very quickly. This trend manifests itself throughout most areas in the US but particularly strong in cities like Los Angeles.
Many houses in LA neighborhoods are skyrocketing in price. People are still cautious about buying a new house and prefer to stay where they are. The fact that the average income is declining makes this effect even stronger. This keeps the supply of houses for sale low and drives up prices mercilessly. Potential home buyers have a hard time finding what they are looking for.
Differences with the real estate bubble hitting around 2008
Despite some similarities to the bubble period in 2008, there are also some significant differences. What’s very crucial in today’s market is that the rising home prices are driven by a strong demand.
The real estate market has about 5 months worth of house sales while prices generally tend to rise when the supply is anywhere below 6 months. A rise in real estate value is inevitable.
Biggest difference with 2008 is that the rising house prices today, are caused by something real (rising demand) and not something artificial (speculation about prices rising) so there’s no bubble forming.
Will we see another real estate bubble in 2015?
Because the rising property prices are caused by something ‘natural’, there’s not really a reason to be afraid of a bubble forming.
Optimistic banks had a huge impact on the previous bubble but they seem to have learned their lesson the hard way in the past years. They aren’t providing mortgage loans as easily as before and in most cases, home buyers have to bring some of their own capital to the table.
The rise in real estate prices that’s happening currently is very much a consequence of supply and demand at work. It’s not a sign of a new real estate bubble hitting in 2015 or anytime soon.