Housing Markets: Headed for Another Bubble?

With national housing prices rising at healthy rates, homeowners, real estate pros and economists are beginning to wonder if another housing bubble is in the cards. Robert G. Shiller, an economist who, along with Professor Karl Case of Wellesley College, developed the S&P/Case-Shiller 10 and 20-City Home Price Indices, suggests that while Americans are confident about rising home prices, they aren't showing the "bubble mentality" about home prices that they did during the pre-recession housing run-up.

Another Bubble in Home Prices?

Shiller describes a bubble mentality as "a self reinforcing cycle of popular belief that prices can only go higher." US home prices are recovering; they've risen by 18.4 percent in the 16 months ending in July 2013. The highest comparable increase in national home prices prior to the recession occurred in the 16 months ending in July 2004. Home prices rose by 22.7 percent during that period. This indicates that national home prices are approaching pre-recession "bubble" levels. Is this good news, or is it a sign of another bubble that's bound to burst? No matter what anyone believes about home prices, it's a fact that what goes up sometimes comes down.

Survey Says: Recent Home Buyers Moderately Confident

Recent updates of a Case-Shiller survey of recent homebuyers indicate that they expect short-term home prices to increase by 5.7 percent annually compared to 2011 survey results, when home prices were expected to increase by 1.6 percent, and 2012 survey results, when recent home buyers expected home prices to increase by 4,0 percent annually. In 2004, recent homebuyers expected home prices to increase by 8.7 percent annually on a short-term basis.

Recent home buyers responding to the Case-Shiller survey expected home prices to increase by 4.2 percent annually. Adjusted for estimated annual inflation of 2.0 percent, this translates to an expected net increase in home prices of 2.2 percent per year. Shiller reports that at this rate it would take until 2031 for national home prices to reach their December 2005 peak.

The Case-Shiller survey asked recent home buyers if they agreed that real estate is the best investment for long-term holders who could buy and hold through changes in housing markets. in 2004, 84.2 percent of respondents agreed. In 2012, 66.4 percent of respondents agreed. Results for 2013 rose to 70.4 percent of survey agreeing with the statement that real estate is the best investment for those able to buy and hold through housing market fluctuations.

The 2013 survey result reflects moderate growth in confidence about housing markets. While tracking mortgage rates and housing market news can provide homebuyers with indications of current developments, consulting with real estate professionals specializing in the areas where you want to buy provides specific information based on local and regional real estate news and housing market trends.

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