Bubble or Not? Warren Says "No"

I keep getting the same question – “Is Nashville experiencing a real estate bubble?” While it certainly feels like it, and anyone who has been in a contract battle with 10 other prospective offers on the same property – that winds up selling thousands of dollars over asking price might agree, I’m not sure we should consider it a “bubble”.  The reality is that real estate nationwide continues to improve from the low point reached in 2012 and Nashville just happens to be a market that is more desirable than most. 

If you look at the first chart below, you will see that nationwide, average prices are still below the high’s reached in 2007 – which would indicate that we still have room, at least from a national perspective, for prices to move up just to reach the pre-recession levels.  And the second chart, which represents the median home prices in the Nashville market for the past 16 years, shows a steady increase that is still under a 5% annual appreciation rate over that time period.  So while we are certainly outpacing the rest of the country on average, I’m not sure that warning signs of a bubble about to burst should be going off.

The weekend before last, Warren Buffett spoke at his company's annual meeting and the "Oracle of Omaha" asserted that the housing market is on stable footing. He said the likelihood of another crisis brought on by falling home prices is "very low." "I don't see a nationwide bubble in real estate right now at all. In Omaha and other parts of the country, people are not paying bubble prices for real estate." A leading real estate information firm agrees. They reported home prices were up 6.7% year-over-year in March and the firm forecasts that prices will come in 5.3% ahead, year-over-year, in March 2017.

I do think that sooner than later we will see some leveling and some of the “irrational exuberance” (to use a quote from Mr. Greenspan) will diminish.  And I do hope that homebuyers remember that homes are a commodity, subject to ebbs and flows in pricing.  We do ourselves a disservice when we start to think, like we did in 2004-2007, that real estate is isolated from drops in value.  It can and will happen at some point in the future.  But I believe, as Warren does, that we are not about to walk off of a cliff any time soon.

Median Home Prices for Nashville, TN (from Trulia)