Is there a Housing Bubble Ready to Burst?

While many analysts are celebrating the slow and steady recovery of the housing market, an article by the borrower advice website LoanLove offers a different view of the current state of the United States housing market. The article cites economists who believe the current housing market recovery stretching back 18 months is not a true sign of the market's economic outlook. Rather, the recovery is built on shaky ground that could collapse.

First, the article comments that affordability still remains an issue in the on-going recovery of the housing market. Home prices increased in 119 of 164 major metros in the final quarter of 2014, according to the National Association of Realtors.

"Rising home prices may seem to be the sign of a recovering and prosperous market, but there is a small group of economic analysts pointing to the current situation as even stronger evidence that a housing bubble is about to burst, particularly since interest rates are supposed to rise considerably higher throughout 2015. The same scenario with rising interest rates occurred throughout the years leading up to the last big burst in 2008," the article's author, James Young, writes.

He comments that while home prices continue to rise, first-time homebuyers are being increasingly priced out of the available supply of homes. Without this burgeoning population of young buyers, current, older homeowners can't sell or upgrade to their next home, further constricting demand.

Secondly, new construction remains depressed, with a "noticeable lack of new construction starts since January 2013." The article notes the ripple effect of a lack of new construction. New construction not only restricts homes for purchase, but also employs fewer builders and construction-related jobs, further limiting the overall economy.

Finally, Young cites shifts in loan practices, as more restrictive lending guidelines push less-qualified buyers towards FHA loans and loans from non-banks, which typically require smaller down payments and have a higher percentage of defaults.

Young comments, "While these analysts are not predicting as severe a bubble burst for the housing market as was seen a few short years ago, they do see a false sense of security over a recovery they say simply hasn't occurred."