The pace of home price appreciation has accelerated this year which has naturally caused talk of a housing bubble to crop up. Just this last week, in a conversation with a group of friends, I was asked if I thought home prices were rising too quickly? While it’s easy, especially under current housing market conditions, to jump to that conclusion, we need to put the current appreciation rates into context first. To learn more, watch the following video or continue reading below.

Home prices fell dramatically from 2007 to 2011 during the housing crash. That was historically a long period of time to experience falling prices and values are still recovering in many areas, especially when you factor in the impact of normal inflation.

Bill McBride, founder of the blog Calculated Risk, summed it up as follows:

“It has been over fourteen years since the bubble peak. In the Case-Shiller release today, the seasonally adjusted National Index, was reported as being 22.2% above the previous bubble peak. However, in real terms (adjusted for inflation), the National Index is still about 2% below the bubble peak…”

Home price appreciation has been accelerating throughout 2020, just ask anyone that has been in the market to buy a home.

The local markets that my team serves are no exception. All have seen strong year-over-year price appreciation.

• Frisco, TX 10.5%

• Prosper, TX 18.1%

• Temecula, CA 15.8%

But how do these numbers compare to national averages and historical norms?

The following graph shows the compound historical average annual price appreciation;

As you can see, homes prices have appreciated by an average annual rate of 3.8% when the numbers are tracked back to 1991, but the pace of appreciation since 2012, after the dramatic price drops experienced during the housing crash, has been 6.1%.

While it would appear the local markets where my team operates could be heading towards bubble territory, they actually aren’t. While the home appreciation rate over the past year has been above the annual average we have seen since 2012, that is not the case when you look at appreciation over the past 3 years.

• Frisco, TX 15% (average 5% per year)

• Prosper, TX 23% (average 7.6& per year)

• Temecula, CA 17% (average 5.6% per year)

Frisco and Temecula are both below the national average while Prosper is just slightly above.

If you were to plot the average annual appreciation on a graph it would look like this;

If you were to then overlay the actual price appreciation we have experienced during the same point in time on top this is how we look;

As you can see, from 2002 until 2008 the actual pace of appreciation was well above the historical trend line. Eventually, that bubble burst and we all know what happened. Since then though, except for today, we have been running below the trend line.

But what about today? Doesn’t that indicate the start of a bubble?

Maybe, maybe not. As mentioned above, when inflation is factored in the median home price today is still below the median home price experienced during the bubble indicating we still have room for growth. It’s also important to keep in mind that the real estate market this year has been impacted like no other.

The COVID Impact on Home Prices

Much of the price appreciation we have seen has been this year. The pandemic has caused a number of households to reconsider their current home and lifestyle in a changing world. Home offices, home gyms, living rooms suitable for video conferencing, and larger yards are all in demand.

While these factors have brought more buyers into the market, concerns about the pandemic have caused many homeowners to put their plans to sell on hold. Realtor.com just released their November Monthly Housing Market Trend Reports which explains:

“Nationally, the inventory of homes for sale decreased 39.2% over the past year in November….This amounted to 490,000 fewer homes for sale compared to November of last year.”

More people buying and fewer people selling have caused home price appreciation to accelerate.

This is Nothing Like 2006

Home prices during the previous housing crisis continued to increase even though home inventory was increasing. Normal supply and demand rules didn’t apply. The housing market and price appreciation was being fueled by speculation and loan programs that required nothing more than fogging a mirror and a signature to be approved. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) explains;

Bottom Line

Very little about life in 2020 has been normal and that includes the real estate market. High demand and low supply have caused real estate prices to appreciate above historic levels. Hopefully, the end of the health crisis is in sight and we will see a return to “normal” price appreciation next year.

If you have any questions about the local market, or a situation you would like to discuss in more detail, please feel free to schedule a call directly with me.