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A decade ago, the U.S. housing market swelled to a bubble of epic proportions. Too many homes were built, and too many people were willing to pay top dollar for them with the help of faulty mortgage products.
When the bubble burst, millions lost their homes and their savings. Home prices dropped for six years, finally hitting bottom in 2012; today, home prices are about 1 percent shy of that 2006 bubble peak.
June marked 50 consecutive months of annual national home price appreciation, with prices up 33 percent from that bottom in 2012, according to a new report from Black Knight Financial Services. It measured the average national home price in June at $265,000, which is within just 1.1 percent of a record high.
The difference today from a decade ago is that these prices are not being driven by faulty mortgage products that people can't afford. They are being driven by a severe lack of supply of homes for sale, as well as near record low mortgage rates.
"If you look at the percent of the median income required to buy the median household, we're at 21 percent, which is very healthy," said Ben Graboske, senior vice president of data and analytics for Black Knight. "In the bubble years it was 36 percent. Rates are super low, and that is a big impact on affordability."
The concern, however, is if those rates start to move up. Then affordability would weaken and home prices could move lower. Also, low rates may make homes affordable, but a sizable number of potential buyers still can't qualify for those low rates and/or cannot meet the down payment requirements. As home prices rise, so too does the down payment.
"It's the credit box. There are a lot of people that cannot qualify because they don't have the credit or the equity," said Graboske, adding, "A portion is not buying because housing had a reputation for depreciating for five years, and people don't like buying depreciating assets."
The other glaring driver of rising home prices is short supply. The most obvious reason is that homebuilders have yet to return to even historically average levels of production. In the existing home market, however, there may be a less obvious and underreported dynamic:
"Households holding onto their previous property when moving seems to be a key factor," wrote Matthew Pointon, property economist at Capital Economics. "That would explain why the share of the housing stock which is vacant but not for sale is still close to record highs even as the share of homes in foreclosure has dropped. After all, with mortgage interest rates at close to record lows, a home is an attractive place to store wealth — particularly given the prospect of steady capital gains."
Home equity, while keeping the housing market healthy, is also driving prices higher. Homeowners today have considerably more skin in the game — 44 percent equity — than they did at the peak of the last housing bubble, when they had about 25 percent or less on average, according to Black Knight. That leaves more room for prices to fall and for homeowners to still stay in the black.
Rental demand, especially for single-family homes, is very strong and is an attractive income stream for individual investors and current homeowners. As millennials age into their prime homebuying years, more than ever before they are choosing to rent single family-homes, because they either don't meet mortgage credit requirements or are unable to save for a down payment because rents are so high.
All these dynamics, unique to today's housing market, continue to put upward pressure on home prices. Of the nation's 40 largest cities, 14 have already seen home prices cross to new highs. They include Austin, Texas, Boston, Charlotte, North Carolina, Dallas, Denver, Pittsburgh, Portland, Oregon, San Francisco and Seattle, according to Black Knight. Only St. Louis saw home prices drop annually. There is, apparently, a limit. San Jose, California, which has some of the highest prices in the nation, did fall off its peak, and price gains in San Francisco are shrinking.