Freddie Mac: Signs indicate there is no housing bubble

The lack of houses for sale and mortgage leverage levels indicate that house prices are not in a bubble

Freddie Mac: Signs indicate there is no housing bubble
Concerns that house prices are currently in a bubble because of substantial increases in recent years are unfounded, according to Freddie Mac’s November Insight.

Freddie Mac considered the lack of houses for sale, credit standards, and mortgage leverage levels as evidence against a bubble.

According to Freddie Mac, the shortage of houses for sale is strong evidence against a house price bubble. Describing the shortage as the most important fundamental in the current market, Freddie Mac said that residential construction is falling short of demand by about 500,000 homes every year and affecting almost all of the country’s largest metros.

Demand for housing is also not increasing due to easy credit, contrary to what happened a decade ago, Freddie Mac said. Credit standards are even tighter than they were at the beginning of this century, which many analysts deem as a “normal” mortgage market.

Finally, Freddie Mac said that homeowner’s equity has seen an almost dollar-for-dollar growth along with the increases in house prices, indicating that homeowners are not increasing their mortgage leverage.

"The evidence indicates there currently is no house price bubble in the U.S., despite the rapid increase of house prices over the last five years,” Freddie Mac Chief Economist Sean Becketti said. “However, the housing sector is significantly out of balance. The incomplete recovery in residential construction following the crisis of the last decade has created several years of pent-up demand for household formation. What we can't predict is how this imbalance will eventually be resolved. Will there be a gradual restoration of a normal balance between supply and demand? Alternatively, will the rate of home building remain stubbornly low, exacerbating the income and wealth inequality that followed the Great Recession? Another bubble appears to be a less probable scenario, but not an impossible one."

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