Surging home prices throughout the country have spurred talk of a housing bubble, as many markets are still recovering from the last bubble bursting in 2007.
But Standard & Poor’s Ratings Services states that, although double-digit gains are ultimately unsustainable, we may not have reached bubble status quite yet.
Home price appreciation can be attributed to a number of factors, including historically low rates, property purchases by investors who are renting homes out and a shortage in home inventory. In fact, recently the S&P/Case-Shiller home price index hit an 11% year-over-year increase, from 8%.
Across the U.S., home prices are back to 2003 levels, yet they remain far from their 2006 peak. Lack of available inventory coupled with high demand has played a large role in this. In April, the sales of existing homes were up 9.7% year-over-year, while existing housing inventory dropped 13.6% from a year earlier, according to the National Association of Realtors.
S&P states that U.S. home prices are relatively low compared to historical values. Prices remain 28% lower than their July 2006 peak.
Additionally, housing remains undervalued about 8% based on the price-to-income ratio, which takes into account the median sales price of a home relative to median annual incomes. The typical median home in the U.S. costs 4 times as much as the median annual income. It’s now at 3.7 times
Overall, S&P expects that the current pace of home prices gains will not last for long; however, it’s too soon to call this a bubble. In fact, as home values are still below their pre-recession peaks, home prices could continue to rise throughout the year.