No Bubble?

From MarketWatch:

Home prices are overinflated in many parts of the U.S. Are we in a housing bubble?

Many housing markets in the U.S. are way overvalued, but don’t mistake the current environment for a housing bubble, economists say.

Home prices are rising to new heights. In September, the median sales price of an existing home rose to $415,200, the highest figure for that month, according to the National Association of Realtors, since the group began tracking the data.

Yet home sales have largely remained depressed. High interest rates impede home buying and home construction, a persistent lock-in effect has resulted in homeowners clinging to their 3% mortgage rates instead of selling, and sellers would rather delist their home than drop their asking price.

Against this backdrop, is the housing market in a bubble? And if it is, when will the bubble pop? 

Housing bubbles happen when home prices shoot up due to high demand and speculation. When the bubble pops, demand falls sharply and supply increases, which then causes a big drop in prices. Homeowners see negative equity in their homes as they owe more on their mortgage than the actual value of their home. They may also potentially face foreclosure.

But don’t panic: There isn’t really a housing bubble, economists tell MarketWatch. 

“Do I think the party’s over? Yes,” Ken Johnson, a professor of finance and real estate at the University of Mississippi, told MarketWatch. “I just don’t think we’re going to have a crash.”

Housing is also hyperlocal, meaning that even though some markets may be overvalued, others may be seeing sharp price declines due to specific conditions such as a high number of listings. 

“It’s really hard with housing to make generalized statements,” Richard Moody, chief economist at Regions Financial Corp., told MarketWatch. “It wasn’t too long [ago] when the big discussion was about when housing was in a recession. Now it’s about if housing is in a bubble.”