Is another housing bubble developing?

We don't see it.  There are huge differences between what's happening now and the tulipmania of last decade, and there's little reason to see danger even in the most torrid of today's real estate markets.

The current heat is a short-term phenomenon.  There's a noticeable pickup in demand.  The slowly improving economy and better job growth mean more would-be homeowners in the market, while cash-paying investors continue to comb listings for properties to rent for a few years before selling.  For both groups, low interest rates are also alluring. 

But supply is constrained, with many homes still stuck in the foreclosure process and owners who managed to stay current on mortgage payments but whose homes aren't worth what they own on them reluctant to sell at a loss.  Plus new-home construction is only slowly recovering…still half the pre-boom level.

The pace of price hikes will ease next year as supply and demand come into better balance.

National average in 2014…say 4% or so, roughly half the 8.5% price increase likely to be racked up in this unusual year.

Then…a gradual return to the historical norm, with average home values rising by about one percentage point more than the inflation rate each year.

Meanwhile a closer look at the situation today is revealing.

Price hikes of 15% – 22% are extreme.  But consider the starting point.  Existing homes in Las Vegas and Phoenix, up 22% from early 2012 to early 2013, are still more than 40% below their peaks.  In San Francisco, L.A. , Atlanta, Detroit and others experiencing strong appreciation (16% or more), prices remain 17% – 45% below their highs.  Only a few major areas are at or close to previous peaks.  Denver, for example, is there, but the Mile High City never experienced the extremes of the bubble and bust.  San Jose, Calif., the heart of the Silicon Valley, is 5% off its peak.

Homes, on the whole, remain affordable.  Only 13% of median family income is typically being chewed up by mortgage payments.  Compare that with 24% in 2006.

Interest rates are likely to stay low for some time, edging toward 4% by  Jan., then climbing by no more than a percentage point or so in 2014.  So homeownership won't zoom out of reach.  And even when the Federal Reserve decides to put an end to its easy money policy, spurring inflation expectations and higher long-term rates, it'll do so graduallly…a slow adjustment to the housing market rather than a shock. 

Even more important:  Only trust creditworthy borrowers are getting loans.  The no-documentation, interest-only only that made it easy for anyone to buy in the 2000s have entirely disappeared, and lenders are keeping a tight rein on credit.

Article from The Kiplinger Letter – Vol. 90, No. 23