Housing Bubble 2.0 is Just a Myth
In an article by Sean Williams for Motley Fool, he laid down the reasons why the prices of homes continue to go up. In fact, the price of a home goes up at a rate higher than the inflation rate. The Consumer Price Index moved up to about 1% but the price of residential real estate had gone up by as much as 5.3%. Home prices are rising because of three reasons: supply constraints, low lending rate, and the tradeoff between renting and buying a home.
Limitation in the Supply of Homes
In the words of JP Morgan economist Jesse Edgerton, supply of homes cannot meet the demand in many areas and that inequality is unlikely to change soon. According to JP Morgan data, builders increase the supply of homes at a moderate pace so housing prices are increasing rapidly from their low prices during the recent recession. In addition, the concentration of high prices is in markets where there is regulation or geographical constraints.
Low Lending Rate
Because of the ongoing low interest rate, there is a continuous demand for new homes. Americans save money for a home and these historical low mortgage rates trigger their buying decision. They also experience improved FICO scores compared to a decade ago so they are able to get the best deals.
Tradeoff between Purchasing or Renting a Home
The rise in house prices get favorable benefits due to the tradeoff between renting and purchasing a home over the long term. The rental market benefits if the interest rate normalizes at 3% because it means that the mortgage rate will also go up so people will decide to rent instead of buy a home. The property owners will increase the rental rates that will result in an increase in the inflation rate. Even the news of increasing the interest rate pushes the rental prices higher than the prevailing inflation rate. If rental prices go up, it will make buying a home cheaper for many Americans. The data suggests that increasing home prices can be a cause for concern, but prices will continue to go up for many years.