Double-digit price increases in some markets hard-hit by the housing crisis prompt the question, are we experiencing another housing bubble? While several factors are combining to push prices up right now, CoreLogic analysts say we are not headed into anther bubble.
“While our recent projected CoreLgic HPI indicates continued home price gains, bolstered by still-tight supply and strong demand, we expect recent double-digit gains to moderate as markets normalize,” said CoreLogic’s president and CEO, Anand Nallathambi in the firm’s June Market Pulse.
During the bubble leading to the recent housing crisis, real home prices increased 62 percent. When the bubble burst, prices fell 47 percent, according to CoreLogic.
This three-quarter decline “is much larger than historical declines even after adjusting for differences in the pre-peak rise in prices,” CoreLogic states.
The accelerated decline and low interest rate environment led to a spike in prices in 2011 and 2012, according to the report, and supply did not increase enough to slow the gains.
The report explains that in any economy, rising demand leads to rising supply and/or rising prices. “The response to higher demand is driven by the short-run elasticity of supply,” CoreLogic states.
In the current housing market, however, supply remains inelastic despite rising demand. The result is “a more dramatic increase in prices,” according to CoreLogic.
Negative equity and what CoreLogic terms “reservation prices”—the lowest price a seller will accept—are the two greatest contributors to the recent lull in supply.
However, as prices rise, many homes are beginning to reach their owners’ reservation prices, leading to more listings on the market. In fact, the increase in existing homes for sale from January to April is the third-highest increase in almost 30 years, according to CoreLogic.
“The increase in the supply in context of current tight underwriting standards should deflate the risk of any bubbles,” CoreLogic says.
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