Should You Worry About a Housing Price Bubble?

The Case-Shiller Home Price Index reported that home prices rose on average 5.7 percent in January from January the year before. That was pretty much as expected, but there was also a statement in the report that could raise alarms in some circles: "Home prices are rising very rapidly -- twice the rate of inflation. There is very, very little supply."

Could we be seeing a housing price bubble building similar to the one that burst in 2006 and took down the market? In one word, the answer is "No." There is very little similarity in today's housing market and the pre-bust market in 2006. Other than rising prices, other factors are very different.

Most analysts agree that a major factor in the crash that began in 2006 was lax lending standards and numerous programs spurring careless home buying and speculative flipping. People were in a frenzy to buy houses back then, and prices showed it. When the bubble burst, it was a nasty situation that lasted for years.

Today's market is very different. The rising prices today are caused by a fundamental economic supply and demand imbalance. There are simply far more buyers than sellers in the current market, and this is creating competitive buying and higher prices.

Another major difference is the financial market and home loan requirements. It's much more difficult these days to get a loan, with the old "stated income" and "no income verification" loans nowhere to be found. This keeps the careless buyers out of the market and isn't contributing to price increases.

So, what can we expect if it's not going to be a big bubble burst? With fewer artificial influences on home price action, the market will take care of itself. There are still a great many would-be sellers who are waiting to list to get back equity they lost in the crash, or just to maximize their equity and sell when they meet their cash goals.

A large group holding onto their homes is the baby boomer generation. Some housing analysts are blaming some of the supply problems on boomers sitting on their homes and not selling at anywhere near the rate they sold in the past. Part of this is because they're not wanting to buy a replacement home in this market, or they don't want to pay high rents. Rents have been rising faster than home prices, and it's not the best time to be checking out retirement rental properties.

The market will take care of itself, and when prices hit points that spur sellers to list their homes, the supply will increase quickly. I don't think demand will rise nearly as quickly when this happens, and there will be a slowing of price increases, and possibly even reversals in some areas. Will some recent buyers get hurt? It's possible, especially if they paid up for a home in a bidding war. However, the overall market will be healthier.

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