Are Home Values approaching a New Bubble?

This is a common question that realtors hear these days, and it comes from a totally understandable caution about where home prices have been and where they’re going.

First, let’s take a look at recent changes in home prices, as shown in the graph below.

 

Case Shiller - Year-over-Year Home Price Changes

Home prices have been increasing year on year, and the value of the annual increase itself has also been increasing.

This could be seen as a worrying trend that is unsustainable in the long term, resulting in an eventual “price correction”, which is a quaint term for a drop in home values.

A drop in home values is something we’re all concerned by, and understandably so.

 

Note that the figures shown above are for the U.S. as a whole. To see how the most recent home price increase is spread across different states, check out the map below.

Recent Year-Over-Year % Change in Price

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When we compare the most recent home price increases to the historic norm, in the chart below, we can see that the last 12 month’s worth of house price increase is twice the historic norm.

And when we compare the projection for the next 12 month’s worth of home price increase to the same historic norm, we can see that although lower than the most recent increase, the projected increase is still higher than the historic norm.

This could be a cause for concern.

Annual Single Family Home Appreciation

 

Note that the projected figures shown above are for the U.S. as a whole. To see how the projected home price increase is spread across different states, check out the map below.

Forecasted Year-Over-Year % Change in Price

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So should we be concerned by a continued annual home price increase?

Only if that increase causes homes to reach a point where homes are no longer affordable. Because that will cause home prices to stop rising and possibly even fall.

And when home prices start to fall, they tend to keep falling for a while.

We can't tell the future, but we can ask 100 experts for their opinion of where home prices are going in the future and hence get the best prediction of future activity.

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The chart below shows that the consensus of the experts is that the value of the annual home price increase will reduce next year.

It is then projected to reduce again the next year and to then level off at a more sustainable and stable annual increase.

This is a good indication that we are not in a bubble and that home prices will continue to increase over time.

Projected Mean Percentage Appreciation

The consensus is an average across many different opinions.

Some of those experts are more bullish about the U.S. housing market (have a more positive view of the future housing market) and some are bears (have a more negative view of the future housing market).

The chart below shows what the projected cumulative home appreciation will be by 2021 according to the bulls, the bears and also an average of the two.

We can see that even the bulls believe that homes will continue to appreciate over the next five years.

Cumulative House Appreciation by 2021

 

Conclusion

Whilst the increase in home prices could be a cause for concern, the projection is that we are not in a bubble and will continue to see home price appreciation for the next five years.