Are We Entering “Housing Bubble 2”?
In the most recent release of its home price index, the Federal Housing Finance Agency showed that the prices of U.S. homes rose only .8% in the second quarter of 2014. That’s important because while that’s the 12th quarter in a row that we've seen a home price increase, it suggests that compared to the same period of time in 2013, that’s a big slowdown.
What’s more, the supply of homes appears to be generally increasing while the average wage growth can’t keep up. It’s what leads some economists to predict we’re entering “Housing Bubble 2,” a time when the housing and mortgage market could experience a combination of events that leads to declining home affordability now and through next year – translating into more supply and less demand.
Part of the problem? It’s easy to say that the economy has added jobs, but what kind of jobs are they and how do they compare overall with the jobs they replaced in terms of pay? According to Tom Showalter of Digital Risk, “In 2014, new jobs paid $47,171, which was 23% lower than the $61,637 average wage of jobs that disappeared during the Great Recession.”
With less of an average income toward financing the purchase of a home, sales of new single-family homes dropping and interest rates potentially rising, something has to give in order to increase demand in the market. If prices don’t come down even more, lenders may need to make adjustments as far as loosening their standards. Whether or not that actually happens remains to be seen.
There are a lot of factors going into the 4th quarter of this year and next year to determine if the housing market is entering a full-on bubble yet again. In the interim, if new home purchases will be slowing, particularly among the middle-class, it stands to reason that people could be looking to put more of an investment into their existing homes, such as the kitchen and bathroom. This could be a good “win-win,” raising the value of the home in the short-term and hopefully making things a bit easier later on when the homeowner is ready to sell.