Bubble vs Affordability Ceiling

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Some buyers have expressed concerns lately about there being another real estate bubble forming and I want to go over some information about the current market so you see for yourself if there is a difference between the current market and the one back in 2005-2006.

Here is a screenshot of an online chart produced by a respected name in research for the real estate industry, Case Shiller. It shows that home prices in the Tampa Bay area are still not back up to the peak levels they were at in 2006. We have had a slow, long-term price recovery which is different than what happened in the 2004-2006 period where prices went up 25-40% per year. Back then there was no market crash prior to the jump in prices, so it wasn’t a recovery or rebound – it was just a huge price increase. Now we are seeing an average increase of 10-12% per year or less and that is after the huge drop in prices in 2008-2009.


The bubble that existed in the 2005-2007 period was a rapid increase in prices that was caused in part by mortgage industry fraud that had been going on for at least a few years with much of the banking industry complicit in creating an explosive situation. Buyers were also purchasing homes they couldn’t afford but could make the monthly payments on their adjustable rate mortgages or negative amortization loans (at least until they reset to a much higher payment a few years later). It was a ‘bubble’ because it really had no foundation in reality and so was able to be popped when the dominoes started to fall.

The current market isn’t showing the drastic increases from year to year and the type of loans that were prevalent back then have not been around for the last several years. Though some of these dangerous loan types are starting to trickle back in, we aren’t currently in a situation where we are about to have loan payment amounts reset making them unaffordable for homeowners. This doesn’t mean that the scenario won’t repeat at some point in the future, it just means we don’t have that happening now.

What we have happening now is a situation where prices are continuing to go up due to strong demand and low supply. We are still below the peak we saw in 2006 but since overall average wages/income has not increased over the past 10 years or so, we are soon going to be hitting into an affordability ceiling where the percentage of buyers who can afford to purchase will start going down. Certain parts of the country such as San Francisco, New York City, Chicago, Los Angeles, etc. are already seeing the beginning of a market slowing due to this. The Tampa Bay area isn’t there yet and probably won’t be there for another year or two.

But what we are starting to see more and more are buyers who aren’t willing to pay what sellers want even if there is a shortage of inventory as well as more homes having to make price adjustments to sell.

Hopefully this helps to clarify the differences between our current market and the market prior to the crash in 2006-2008. If you have any questions about this, don’t hesitate to contact me about them.

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