The Federal Housing Finance Agency released their House Price Index (HPI) last week and it showed that home prices rose 1.7% in the month of May. Year over year they were up 18%. The HPI measures home pricing on single-family homes purchased with conforming loan limits.
The “gold standard” of home appreciation was also released last week via the Case Shiller Home Price Index. It showed that home prices increased by 2.1% in the month of May. Year over year the index showed that homes across the nation increased by 16.6%, which is 2% higher than last month’s report and a new record high.
Since the market has been so hot, many media outlets are calling for a housing bubble. Well, what would cause a housing bubble?
In a “bubble” environment, like we saw in the past, there is a large amount of supply and a lack of demand. For example, in 2007, there were roughly 3.7 million homes for sale and not enough demand to consume the supply. In 2007, there were also many other dynamics such as looser lending laws and individuals getting qualified who would not have met the guidelines of today’s lending world.
When looking at the current environment, we have the tightest housing inventory on record, with only 1.2 million homes for sale and some of the strongest demand ever seen. On top of that, the demand is increasing every year due to demographics. When we compare 2007 to today, currently there are 12 million more households (demand) and 2.5 million fewer homes (supply). So yes, the housing market is on fire and appreciation remains hot, but because of the current dynamics, we are not seeing a housing bubble as certain outlets are announcing.