There has been a general slowdown in sales across the country despite continued low unemployment and steady wage growth. A strong demand for home buying is emphasized by higher prices and multiple offers on homes for sale in many submarkets (individual neighborhoods). As has been the case for some time now, low inventory is the primary culprit rather than lack of offers. With job creation increasing and mortgage rates remaining low, the pull toward homeownership is expected to continue.
With housing starts drifting lower some are beginning to worry that a more serious housing shortage could be in the cards if new construction and building permit applications continue to come in low while demand remains high. Homebuilder confidence remains strong though so no predictions of a gloomy future there.
As for a “bubble” that some like to predict, here are some key factors to consider:
- Has the local price index been going strong with a solid upward path for more than a year?
- Is the current level of the index well below the previous peak? If current prices are higher than the last peak, there is more of a chance the market has overheated and due for a correction.
- Is the percent of houses rising more than 50 percent and going up or holding steady? This was the key harbinger of the last crash: The overall price indexes at the metro and ZIP levels were all rising, but the percent of individual houses rising was in sharp decline. In most markets, the percent of houses rising plunged within about 18 months from nearly 100 percent to below 50 percent. The market indexes continued to rise until the percent of houses rising crossed the 50 percent line. Once this happened they finally turned downwards.
- Is the percent of houses falling holding relatively steady? Currently, nearly all markets are seeing the smaller percentages of houses rising. But the good news is that, in most cases, these houses are not joining the ranks of declining houses. Instead they are flattening out at around the inflation rate of 2 percent or below. (“Rising” is defined as going up faster than 2 percent per year).
The key takeaways from all this should be that while prices may not be booming to the extent they have been in the past few years, most markets that are cooling off are doing so gradually rather than going up way too much and setting up a bursting bubble. And, there is a lot of diversity in housing markets, so it’s important to stay close to your market and not take for granted that the headlines can apply everywhere. Make sure to consult with a Realtor who pays attention to both general market as well as submarket trends (local neighborhoods) and can you help you create a plan that will benefit you the most.
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