AS HOME VALUES SOARED IN THE EARLY 2000s, real estate seemed to many like a can’t-miss investment. Many believed that the ever-increasing value of real estate would never stop and that buying real estate was a sure path to great wealth.

That myth came crashing down as housing collapsed in 2007 and the nation plunged into the Great Recession. The scars from that recession are deep and many wonder today if the housing recovery that we are currently experiencing is real, questioning whether the current level of home values is sustainable. Some fear that we may be in the middle of another disastrous bubble similar to the early 2000s.

Hindsight is always 20/20. It is easy to look back on the early 2000s and see exactly what went wrong and, with data, see clearly the early signs of the collapse.

Are we in a housing bubble similar to the bubble of the early 2000s? Are we headed for another collapse? One way to look at it is to compare where we were then and where we are now.

One key element is supply and demand. In the years leading to the crash, there was an incredible artificial demand for housing. The craziness of borrowers being able to get financing with poor credit, no money down and questionable incomes presented the market with an endless stream of buyers.

In May 2006, as the housing market began to collapse, year-over-year sales of homes were down sharply as the subprime lending market began its collapse and the artificial demand evaporated.

The lending environment today is much the opposite, with intense regulation and scrutiny of lending practices. If anything, we have gone too far to the opposite extreme, with lending requirements that in many cases are locking some buyers out of the market.

When we discuss demand, we must look at affordability, as in a normal environment folks need to be able to afford the homes they are purchasing.

When the market started to recover in the second quarter of 2012, affordability was very high, as values were quite low and interest rates were at historic lows, too.

Values have risen significantly and interest rates, while still quite low, are higher than the historic lows of 2012-13. As a result the affordability index has fallen significantly and is now very low in certain markets, while still remaining quite healthy in others.

A recent survey of 20 metro areas by Zillow revealed that 5 percent or more of residents wanted to purchase a home in the next year. More revealing, perhaps, was the finding that 10 percent of renters desired to purchase a home. This translates into 4.2 million first-time home buyers. Given the results of this survey, it would seem that demand remains high.

Inventories of available homes for sale remain low as demand remains high, which normally translates into rising values. The wild card is affordability. With real wage growth remaining stagnant, will these millions of folks who want to purchase actually be able to buy a home?

Guy Benjamin (CA BRE License #01014834) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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