By Mike Bodeen · 13 August 2018
We continue to hear rumblings that our local real estate market may be in a housing bubble. Don’t get me wrong housing bubbles are real. If you look at the appreciation chart below, these bubbles have happened to us twice in the past 14 years, though, as the I’ll explain, the 2nd one wasn’t really a bubble at all.
The real appreciation bubble occurred in 2004 – 2005. Prices rose crazy high in those years then plummeted from 2005 – 2008.
Bankrate.com defines a housing bubble as:
“A real estate bubble, also referred to as a “housing bubble,” occurs when the price of housing rises at a rapid pace, driven by an increase in demand, limited supply and emotional buying. Once speculators recognize that housing prices are on the rise, they enter the market, further driving up demand. The phenomenon is called a bubble because at some point it will burst.”
A picture, or in this case a chart, is worth a thousand words.
On both occasions, the two bubbles we experienced were preceded by two radical and short periods of hyper appreciation. There was however a difference between the two bubbles.
I contend the major bubble was 2004-2005. This followed the above definition perfectly. Irrational exuberance with no monetary controls. Values crashed as much as 45% in 2008 with that steep dive lasting three years between 2006-2008.
There was another radical run-up in value from 2011-2012 but no steep dropped followed. There were a few years (2013-2014) of some real stagnation were a high inventory and waning demand could have sunk prices, but values remained steady. The market was tested then to see if our regained values of 2011 and 2012 were real, and it seemed to suggest it was.
Now look at the past 4+ years from 2014 to the present. This is what I call real market stability which began following the correction. The appreciation rate has been an average 5-7% and increasing to 8% to 9% this past year. This is a strong market.
Further evidence is that though we’re still in a tight supply market, appreciation has grown, but not radically. Now we are short on inventory, yet buyers are being proportionately cautious. This buyer attitude, and their unwillingness to pay too much, is keeping values from rising too fast to soon. In other words, the normal emotionally driven buyer enthusiasm that accompanies a bubble, doesn’t seem to be there.
When we begin to see another radical climb in values, indicating unchecked buyer optimism, we might start talking about a possible bubble, but in the words of Aragorn from Lord of the Rings, Return of the King, “…it is not this day!”