Is This Another Housing Bubble?

(Published on - 8/17/2018 2:22:00 PM)

One of the most basic governing rules of determining the value of real estate is the basic economic principle of supply and demand. The rapid appreciation of our local markets, which is being seen nationwide, is a direct reflection of this principle. There are simply fewer homes for sale than there are buyers for those homes. Supply is low, demand is high, which is what’s driving the value of your and your neighbors’ homes up. In fact, according to The Indiana Association of Realtors, home prices are up on average 7.5% statewide. Locally even higher, with Porter County at 8.9% and LaPorte County at 8% year-to-date. Not surprisingly, inventory of homes for sale decreased 12.7 percent over this same time frame. Helping spur the recent demand for homes are the inevitable increases in interest rates. After setting records for all-time lows, rates have steadily began increasing as confidence in the market increases. As rates creep up, demand will likely begin to level off.  

What we are experiencing is a rather predictable market reaction. However, it’s also an unpredictably repetitive cycle as history promises to repeat itself. As sure as the sun sets in the West, prices will go up and back down overtime. To be clear, we can predict the reaction to variations of supply and demand, but like the stock market we can not predict independently when exactly supply and demand will fluctuate. You can try to time the housing market as many have tried timing the stock market, but wisdom warns otherwise. The most recent real estate bubble in 07/08, which many are drawing comparisons too, was not a reaction to supply and demand, but rather what proved to be unethical lending practices revolving around subprime loans. To phrase it differently…greed. Lenders were giving out loans to otherwise uncreditworthy applicants and in exchange for the greater risk, charged a higher interest rate. As it turns out, these folks, especially the ones with an adjustable rate mortgage, could not afford their mortgage payment and many were forced to foreclose leading to what many claim as the beginning of ‘the great recession’.

So, when we get down to it and you ask if we are in another real estate bubble, I personally would like to think not. As confidence in the overall economy increases so too does the average person’s ability to borrow, increasing demand. The principle of supply and demand is not to be blamed in the creation of a real estate bubble, but perhaps cause and effect is as seen in 2007. If inventory was not so low their may be reason for concern, but at this time you can sleep well knowing we are merely experiencing an appropriate market response to supply and demand.