While the economic recovery has been sluggish at best, one bright spot that has seen near consistent improvement for several years is ironically one of the parts of the economy that burst to precipitate the whole recession. The housing market has seen resurgent growth over the past few years in almost every category. Housing starts, rising home values, fewer foreclosures, on nearly every metric there has been improvement. A latent residual fear from 2008 remains however: Is this the start of another bubble? With growth rates for median sales prices in the double digits year over year in some cities, it’s difficult to not have this concern.
What is so different from this period of growth than the explosive growth that led up to 2008’s crash? The foremost difference is the prior conditions of each. In the pre-bubble era, prices had grown exponentially from a normal growth rate then peaked and burst due to a variety of factors, including loose mortgage regulations and unqualified loans being ensured within securities. With so many cracks in this structure, it’s extremely apparent why the bubble eventually burst. Yet the current situation is fundamentally different. The starting point for each of these markets has been significantly lower than they were in 2005, due to the prior burst. As such, aggressive growth like was seen before the recession is starting further back, and as a result, the median home values in almost every market has failed to reach peak values. For those that are, growth cools tremendously, dropping down to single digits after months of 20% growth in median list prices. This can be attributed to the market and those behind it learning from previous mistakes. Rather than freewheeling as they have previously, banks have been reined in when it comes to housing loans. This leads to the second biggest difference: Mortgage standards.
Mortgages now have higher qualification standards, and this has reduced the number of mortgages being doled out that end up being defaulted on. This too has its own inherent problems, as it has throttled the number of people who can obtain mortgages to only the most qualified borrowers. This over correction serves to limit the number of people who can afford to purchase new homes, especially those looking to “trade up” by selling their current home for a more expensive house. Currently, investors have driven much of the growth due to the ability to accept more risk and having the funding available. In order for the growth to continue and not stall, regulations have to be loosened to a more acceptable level. A return to the non-existent standards of 2006-07 is obviously not feasible, but the housing market and regulators can learn from the mistakes made without panicking and over correcting.
Caution and trepidation following a crisis is only natural, and in healthy doses can be beneficial to preventing a repeat. The problem comes in when this apprehension overrides common sense and starts to impede the recovery process. While the housing market was in part responsible for the crash, it has also done its fair share in driving the recovery. For this reason, it needs to be given the best chance to continue its strong growth, in order to help drive up the rest of the economy. When home values go up, homeowners feel more comfortable and confident, which is ultimately a good thing for economic growth. Why get in the way of that?
RealtyTrac. “Stats & Trends”. http://www.realtytrac.com/statsandtrends. Aug. 14th, 2013.