Statistics show no need to fear a housing bubble at least for a few years. There is a link between home price growth and income growth which at today's levels homes are still undervalued relative to incomes.
"Because most homeowners use their income to pay their mortgage it follows that an established relationship exists between income and home prices. This relationship means that home price growth cannot be sustained at higher levels than income growth because housing would become unaffordable, demand would decline, bringing price growth back into alignment with income growth." A correction has already taken place and with rising interest rates will continue to slow the pace of home price appreciation to a sustainable level.
Report: Despite Price Gains, Homes Still Undervalued
Despite double-digit percentage increases in home prices, homes are still undervalued relative to incomes, according to CoreLogic.“Much of the recent house-price appreciation is a result of market correction for the significant undervaluation caused by the price declines in the late aughts,” CoreLogic chief economist Mark Fleming writes in a blog post. He adds that “there is no need to fear a bubble for at least a few years to come, if at all.”
Fleming says that home prices did get way ahead of income levels in the early 2000s, but a significant over-correction has taken place. He argues that incomes are key to forecasting home prices, saying that home-price growth cannot be sustained at higher levels than income growth because housing would become unaffordable and demand would decline.
“Rising interest rates and the ‘unlocking’ of pent-up supply as home prices continue to increase are expected to slow the pace of home price appreciation,” Fleming notes. “At the same time, continued improvement in the economy will modestly increase income growth. The net effect is that home prices are expected to remain slightly undervalued relative to income levels through the end of 2015.”
Source: “Home Prices Actually Undervalued Based on Incomes: CoreLogic,” Mortgage News Daily (March 12, 2014)
Source: http://realtormag.realtor.org/daily-news/2014/03/13/report-despite-price-gains-homes-still-undervalued
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