Alternative version: While housing prices continue to rise, a housing bubble appears unlikely.

Last week we learned that housing prices grew rapidly yet again in January.

The S&P CoreLogic 20-City Home Price Index experienced a 19.1% increase from January 2020 to January 2021, which is an impressive growth rate, given that it was built on top of the already high 11%-plus growth rate reported in January 2021.

Some economists are beginning to worry about a possible housing bubble due to the unusual increase in housing prices by more than 32% in just two years.

The growth rates we are currently observing are higher than those that preceded the Great Financial Crisis, as shown in the chart depicting the acceleration in prices over the past year and a half.

The rise in mortgage rates from 2.7% to nearly 5% has made many people nervous about taking out a loan.

The bull market in housing today differs significantly from the one that ended disastrously over a decade ago, as there is less speculation occurring.

We do not observe investors purchasing multiple condos with the intention of quickly selling them at a substantial profit within a short period. Additionally, the key factor that enabled this "flipping" activity, which was the ease of obtaining credit on favorable terms, is no longer present.

The GFC taught banks and regulators a valuable lesson that they won't forget.

Lending practices such as small or no down payments, adjustable-rate mortgages, undocumented mortgages, teaser rates, pay-option ARMs, and inflated sales appraisals are not contributing to the current strength in housing prices.

The market for bonds backed by sub-prime or Alt-A mortgages is limited, which restricts origination activity for unqualified borrowers.

The explanation for the strength in today's housing market is more straightforward.

The large mismatch between the supply and demand for housing, particularly for lower-priced, entry-level homes, has resulted in a lack of speculation and easy credit.

Since the GFC, new home construction has been significantly lower on the supply side.

Despite the housing market collapse, construction deficiencies have persisted until the present day.

Building activity is being hindered by several factors, including a shortage of labor, supply-chain disruptions, rising raw material costs, and land shortages due to zoning and land-use regulations.

The intensified headwinds to more rapid construction have resulted in a constrained supply of housing, which could lead to elevated prices. The chart below indicates that at the current sales pace, only two months of supply are available for sale.

Several factors have contributed to the significant increase in demand for housing in recent years.

A significant number of Millennials are currently reaching the age when people typically purchase homes. Although some had previously delayed homeownership due to low incomes or insufficient savings, the improved job market is now motivating many to buy a home.

The trend toward "work from home" or "WFH" is likely to continue as a lasting legacy of the COVID pandemic, and since these sources of demand are unlikely to reverse abruptly, it seems that demand will remain high in the future.

The Federal Reserve's artificial suppression of interest rates is the reason for today's bull market in housing.

The problem arises due to the heavy reliance on low mortgage rates, which is now becoming an issue as mortgage rates increase.

The three factors that determine housing affordability are household incomes, the cost and availability of financing, and housing prices. While all three of these inputs have been increasing, the growth in the two factors that decrease affordability (housing prices and mortgage rates) is outpacing the increase in the factor that improves affordability (household incomes).

Since the end of last year, a lot has happened and housing affordability has dropped significantly from the highs in 2012-2013 to the most recent reading for the fourth quarter of 2021.

With the rise in home prices and mortgage rates, the affordability reading for the first quarter of 2022 is expected to decrease, despite the growth in household incomes.

Higher home prices and strong demand are obviously good things for homebuilders.

Despite the current high homebuilder sentiment, the rise in home prices, mortgage rates, and limited listings have caused many potential buyers to give up on their search.

If the number of listings stays low, a smaller number of buyers is required to maintain rising prices.

The housing market plays a crucial role in the U.S. economy. Artificially low interest rates may have accelerated home price growth, but this growth will ultimately make it difficult for first-time buyers to enter the market.

It is difficult to envision a crash comparable to the GFC due to the intense demand and limited supply.

Farr, Miller & Washington, a wealth management firm in Washington, D.C., is led by president Michael Farr, while Keith Davis is a partner at the company.