Lead Trulia
economist Jed Kolko issued a report this week saying that home prices
nationally are in rebound mode, not bubble mode, despite impressive gains in
many parts of the country (including Denver).
Prices today
are still 7% undervalued, according to Kolko, based on fundamentals such as
supply, demand, new construction capacity, demographics, interest rates,
incomes and rents. At the beginning of
2006, according to Trulia’s formula, US homes prices were overvalued by 39%.
Because
mortgage credit remains very tight, the market is still dominated by
well-qualified buyers. Even in a
downturn, well-qualified buyers who make real down payments are far more likely
to stick things out that the “no down payment” crowd who dominated the buyer
pool during the final stages of the last run on housing.
New
construction activity is still far, far below history norms, and this year new
construction will only amount to about 35% of the number of homes built during
2006. This cap on supply after years of
no building at all figures to protect values for at least the next few
years.
Will there
ever be another bubble? According to
Trulia (and me), the answer is yes. The history
of US real estate is dotted with booms and busts. The question is always, when will it happen
and what will it look like?
As long as
mortgage rates remain relatively low, new construction remains muted compared
to previous levels, and mortgage finance remains responsible with buyers
expected to make real down payments… the market will continue to grow and
prices will continue to rise. As long as
job growth (even slow growth) continues, as long as demographic trends hold up,
and as long as prices remain affordable compared to rents… the upward march in
prices figures to go on.
When rates
rise, the quality of new buyers falls, builders overbuild, and the economy
falters… the tone of this conversation will change sharply.
But for now,
housing is clearly the healthiest component of the US economy.
