Is there a new housing bubble forming in San Diego?

The San Diego housing market is in the throes of the HOT spring/summer selling season.  Home prices have increased to almost 2006 prices which was just before the floor fell out of the housing market, and that has tongues wagging about whether we have another housing bubble approaching.

There are more and more headlines that point to another housing bubble.  The media industry is an industry that has been struggling for quite some time, and unfortunately has learned to tap into our fears to get you to read their articles.

As home prices in San Diego continue to increase we can’t help but to wonder if what they say is true.  And according to CoreLogic they are forecasted to go up again this year.  With California home prices are projected to increase 11.6% this year, it is very easy to understand where the fear about another housing bubble is coming from.  Currently in San Diego County median home prices have increased +9.2% from April 2015 to April 2016.

But lets look at the data and see what is really happening.  It’s pretty simple, this picture shows the way that the housing market works:

If we have less 6 months of inventory, it means that there are not enough houses for sale to satisfy the thirst of the number of buyers that are out there., so buyers compete with each other over the house.  And how do they compete against multiple offers?  They raise the price of their offer. 

If we have between 6 & 7 months of inventory  that means that we have a normal market and the prices only appreciate with inflation.  If we have more than 7 months of inventory that means that there are not enough buyers to satisfy the thirst of the sellers who are trying to sell their home, in that case sellers are competing with each other.  How do sellers compete?  They lower their prices. 

Right now in San Diego County according to data below that was provided by SDAR (San Diego Association of Realtors) you can see that our months supply of inventory has dropped to 2.3 months for detached homes and 1.6 months for attached homes.

Is there a new housing bubble forming in San Diego?

This is called Supply and Demand.  It’s really that simple.  Our supply is way down!  So what is taking place is that we have a very strong demand for housing and a very limited supply of homes. 

We are experiencing a pent up demand of buyers that started about 2 years ago.  This is when across the country we started to expect the increase in mortgage rates. 

But sellers were still caught in a trap, some were caught in the trap of an equity situation where they didn’t have enough equity to sell.  They had to wait for prices to go up.  Or maybe they were just nervous about the housing market and thought it better to take a wait and see approach.  As both of those things continue to change, equity in homes continues to rise and people feel more confident those sellers will come to the market and it will start to balance out the buyer demand with the supply.

Some of you may think “well wasn’t there a supply and demand issue back in 2006?”  Yes.  But in 2006 it was an artificial demand created by very loose credit standards in the mortgage industry. 

Here is the historic data for the Mortgage Credit Availability Index that is put out by the Mortgage Bankers Association:

 The higher the graph the easier it was to get a mortgage, so what we can see is that back in 2004, 2005 and 2006 the number of mortgages skyrocketed.  Pretty much anyone could get a mortgage.  So that was not legitimate demand.  There were people earning $40,000 a year saying that they made $150,000 (stated income) in order to get a house.  So back in those years buyer demand skyrocketed but it was artificial because they really couldn’t afford those homes.  And THAT is why we had a housing bubble.

So while we see the number of mortgages increasing slightly above the yellow line (balance before crash) but we are nowhere near where we were in 2006.  This is not artificial demand in the market right now, these are real people, real families looking to buy a home.  There are just not enough homes for sale. 

NO!  We are not headed for another housing bubble.  We just have pent up buyer demand that believe what most of us do that mortgage rates are going to go up. 

The Bottom Line:

Buyers:  Yes, it is competitive, and yes you may be facing multiple offers but if getting the most house for the lowest payment is your goal then NOW is the best time to get into home ownership.  Lets' talk about your options.

Sellers:  The BEST time to sell is when there is less competition and huge demand!  In other words NOW!  Find out what YOUR home is worth in TODAY'S market.

Is there a new housing bubble forming in San Diego?