Are WE in a Housing Bubble?
Part 2 of a 4 part series on the current housing market.
As we learned last week, a housing bubble is when home prices go up dramatically and then something happens that causes them to drop suddenly and drastically.
Many people lost their homes to foreclosure and were forced to declare bankruptcy after the financial crash in 2008.
Currently, the real estate market is booming. Prices went up by double digit percentages from 2019 to 2020.[1] To the general public, this looks a lot like the market of 2008 and has left many wondering: are we in another housing bubble?
Are we in a housing bubble?
The quick answer? No.
The longer answer? Economists and real estate experts don’t believe that the current market pricing increase is the result of a housing bubble.
The longest answer? Let’s go back to those factors that contributed to the 2008 housing bubble.
People were buying multiple properties, there were tons of new builds available, and absolutely anyone could get a mortgage for absolutely anything.
Multiple Properties
In the current market, people are not buying multiple properties.
Millennials are currently the largest demographic of buyers and are primarily purchasing homes that they are moving directly into rather than properties that they are renting or flipping.
This matters because it means that people are not over-leveraging themselves and their properties, a key factor to preventing bankruptcy.
They are building equity in their primary docile and not using it as collateral on secondary homes, rental properties, or flips which means that if something does go wrong, they’re not stuck with incredible amounts of debt.
New Builds
Secondly, in the 2000’s there were a TON of new builds. Inventory was at all time high (4 million homes were available in 2007 alone).[2] In the decade prior to 2008, there were an average of 1,761,000 new homes built each year. Over the decade following, that number dropped to 885,000.[3]
Supply shortages are a huge component of the current market. According to many economists, what we are currently seeing is a product of true supply and demand.[4]
Supply shortages are a huge component of the current market.
More people want to buy homes than there are homes available. This leads to an increase in price for the homes that are available.
It is expected that as home builders ramp up production to meet the current demand, price growth will slow to more historical paces.
Mortgage Practices
The biggest factor in the 2008 crash was risky mortgage practices. Banks were offering loans to people who could not afford them and using irresponsible and often deceptive terms.
This led to people buying homes they could not afford and often buying multiple properties to take advantage of low mortgage payments.
When the stock market crashed many people were unable to make their mortgage payments and saw the value of their properties deflate drastically and quickly. In 2008 alone, over 800,000 homes were foreclosed on.[5]
In 2008 alone, over 800,000 homes were foreclosed on.
Currently, mortgage regulations have been tightened up substantially since the crash in 2008.
Credit quality is much higher now—on average, 70% of borrowers in 2020 had a credit score of 760 or higher. In 2007, 13% of borrowers had credit scores of less than 620 (versus only 2% in 2020).[7]
Teaser loans, such as balloon payments, composed 35% of mortgages in 2007. In March of 2021, they were 2.4% of the market.[8]
Additionally, equity-rich properties (properties with debt less than 50% of their value) are rising while equity-poor (or “underwater”) properties are falling.[9]
All in all, more regulated lending practices combined with a limited supply of inventory and more people purchasing homes for primary living have created a market where values and demand are at a high.
While the outside perspective: high prices, low mortgages rates, and increased demand, look similar to the market of 2008, those with an eye on the details can see that this isn’t a bubble. It’s textbook supply and demand.
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[1] https://www.inman.com/2021/05/19/dozens-of-economists-dont-see-any-bursting-bubbles-on-the-horizon/
[2] https://www.floridarealtors.org/news-media/news-articles/2021/05/real-estate-market-isnt-bubble-it-just-isnt?utm_campaign=5-10-2021+Florida+Realtors+News&utm_source=iPost&utm_medium=email
[3] https://www.census.gov/construction/nrc/historical_data/index.html
[4] https://www.floridarealtors.org/news-media/news-articles/2021/05/real-estate-market-isnt-bubble-it-just-isnt?utm_campaign=5-10-2021+Florida+Realtors+News&utm_source=iPost&utm_medium=email
[5]https://money.cnn.com/2009/01/15/real_estate/millions_in_foreclosure/#:~:text=A%20total%20of%20861%2C664%20families,received%20a%20notice%20last%20year.
[7] https://www.inman.com/2021/05/07/bubble-trouble-the-impending-burst-is-mythical-at-best/
[8] https://www.inman.com/2021/05/07/bubble-trouble-the-impending-burst-is-mythical-at-best/
[9] https://www.attomdata.com/news/market-trends/home-sales-prices/attom-data-solutions-q4-2020-u-s-home-equity-underwater-report/