Housing Bubble Burst In 2014? (The Possibility Is Very Real)

While many in the real estate, home lending and related sectors have celebrated the slow, but steady, progress of the housing market, there remains a segment of economists who are not nearly so optimistic. These experts believe a housing bubble burst in 2014, or soon thereafter, is very likely.

A bubble in the housing market occurs when home prices rise at a rate well beyond the rate of inflation and the rate of increase in rental rates.

In most cases, those predicting another bubble is on the horizon believe the current housing market recovery, stretching back about 18 months or so, is not a true sign of the sector’s economic outlook at all. Instead, these economists believe a so-called recovery of the housing market is being built on a false foundation.

Affordability is at Issue

Their concerns arise over the pressure that accelerated home prices place on those wishing to live the American dream by purchasing a family home. Year-over-year price increases could signal another housing bubble, warn some economists. Home prices jumped upward in 119 out of 164 major metro areas the final quarter of 2013, according to the National Association of Realtors.

Rising home prices may seem to be the sign of a recovering and prosperous market, but there is a small group of economic analysts pointing to the current situation as even stronger evidence that a housing bubble is about to burst, particularly since interest rates are supposed to rise considerably higher throughout 2015. The same scenario with rising interest rates occurred throughout the years leading up to the last big burst in 2008.

One of their biggest concerns is that first-time home buyers are being priced out of the market. First-time buyers are essential to sustaining a healthy housing market because they provide a pool of buyers for those wishing to sell their home and upgrade to a new one of greater value. Without a strong supply of first-time buyers, existing home owners will have difficulty selling their home or even reaching qualified buyers.

These economists also point to lackluster improvements in the unemployment rate and the influx of new investors willing to pay above list price for rental homes as complications that serve as further evidence that a bursting housing bubble is inevitable.

New Construction Lagging

Of additional concern is the noticeable lack of new construction starts since January 2013, levels that are not coming close to meeting demand. This lack of new construction has a ripple effect on the economy because it signals a lack of construction-related jobs as well.

Shifts in Loan Practices

Further adding fuel to the flame, according to these analysts, is an industry dealing with stricter loan requirements. That reality has simply sent more prospective home owners toward FHA loans or even loans from non-banks, routes that typically require smaller down payments. Historically, those home buyers putting less cash into the deal have a higher percentage of defaults.

While these analysts are not predicting as severe a bubble burst for the housing market as was seen a few short years ago, they do see a false sense of security over a recovery they say simply hasn’t occurred. If housing prices are allowed to continue to rise at rates well above the pace of inflation and rise in rental rates, they warn, the severity of the potential housing market bubble could reach crisis level.