Why Builders Don't Fear Housing Bubble

June 10, 2013

Home prices are rising rapidly in many markets, but Pacific Coast Builders Confidence attendees name two main factors that should quell fears of a new bubble.

“The ultimate reality check is affordability,” Ara Hovnanian, chief executive of homebuilding giant K. Hovnanian Enterprises, told The Wall Street Journal.

Home prices soared during the housing boom, making homes less affordable for families earning the median income. The National Association of REALTORS®’ affordability index fell to 107.6 in 2006—often considered the height of the housing bubble. But following the housing crash, housing affordability rose (the higher the index, the greater the affordability). In 2008, the index climbed to 137.8, and reached a high of 193.2 in 2012, according to NAR.  

Based on median income figures and median prices, the average American family earns “nearly twice as much as it needs to afford a reasonable home and not break the bank on monthly payments,” The Wall Street Journal reports. 

“If mortgage rates went up 270 basis points [or 2.7 percentage points], affordability would fall to about 138—one of the highest affordability rates of all time,” Hovnanian says. 

Another reason why many builders say they aren’t concerned the market is heading for another housing bubble: Home construction is still near record lows. Home building is only about half of what is considered healthy for the sector. 

“We’re coming from such depressed levels that we’re not even back to what’s normal,” says Jonathan Jaffe, chief operating officer of Lennar Corp., the third largest homebuilder in the U.S. “We’ve got a long way to go before I think you can talk about excess, or about a bubble, or before rising interest rates will affect that fundamental demand.”

Source: “Builders Sniff at the ‘Bubble’ Talk,” The Wall Street Journal (June 7, 2013)

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