Too Early for Bubble Talk, Despite Surging Home Prices

As the housing market rebound continues to strengthen, with annual home prices rising more than 10% nationally, it may be premature to think the nation is setting itself up for another bubble, according to Standard& Poor’s Ratings Services.

While double-digit price gains are unsustainable, according to S&P, it is too early to consider the current state of U.S. housing as being in a bubble. 

Historically low borrowing costs, property purchases by investors looking to rent them out, and the undersupply of new homes for sale have contributed to rising home prices, notes U.S. Deputy Chief Economist Beth Ann Bovino. 

Recently, S&P raised its 2013 forecast for the S&P/Case-Shiller 20-City Home Price Index to an 11% year-over-year increase, from 8%. While this was the biggest jump in seven years, recent increases have been from significantly depressed levels.

Nationally, home prices are back to about 2003 levels, however, they are still far off their 2006 peak.

This comes from a bit of a supply-demand imbalance, with the sales of existing homes in April up 9.7% from a year earlier and existing housing inventory 13.6% below a year earlier—representing a 5.2 month supply at current sale pace, according to the National Association of Realtors.

Housing is still undervalued about 8% based on the price-to-income ratio, notes Bovino, which looks at the average sales price of a home relative to median annual incomes.

“In any event, Standard & Poor’s believes that while the current pace of gains in home prices may not last long, it’s premature to describe the market as being in a bubble,” writes Bovino. “In fact, with home values still well below their pre-recession peaks, we expect prices to continue to rise this year.”

Written by Jason Oliva

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