Housing prices are appreciating. They seem to be going up higher and faster than ever. This is making some people fearful that the market is going into another bubble. To see if that is happening, let’s take a look at why the last bubble happened 10 years ago.
Back then, housing was in great demand. The reason there was so much demand was because mortgage lending standards were way too easy. Mortgage companies were giving loans to people who were not qualified to either make a purchase or for the amount that they were good for. As an example, My 19 year old son, who worked as a waiter while in college, was approved for an $800,000 loan. Why? He could breathe and he had a good credit score. People in his situation caused home prices to rise precipitously. Due to this increase in demand, home builders just kept on building even though the demand was not there for all of the new construction.
Eventually all this new construction, combined with many properties coming on the market due to foreclosures and short sales, meant that there were too many homes on the market. And all this was caused by lending standards that were too lenient.
So what is different today? Today’s mortgage lending standards are much more stringent. They have eased up over the last few years, but they are nowhere near as loose as the mortgage standards were in the early 2000’s. New construction starts are coming more in line. New construction starts are actually below new construction starts going all the way back to 1980.
As to home prices, most homes still haven’t returned to the prices they were at a decade ago. So due to appropriate lending standards and new construction levels below what is necessary, and the fact that home prices haven’t recovered, this leads me to believe that fears of a housing bubble over-exaggerated.