Home prices are soaring.
Housing inventory remains staggeringly low.
Builders are bringing as much product to market as possible, and trying to sustain it despite skyrocketing material costs.
With the above issues happening, it’s no wonder folks are holding their breaths expectantly and wondering… “When is the bubble gonna pop?” and “Is the housing market really gonna crash?”.
We’re here to give you the really, really good news.
We are not in a housing bubble, and we are not anticipating a housing crash anytime soon.
The tune may be similar to years past, but it’s definitely not the same dance we’re doing.
We’ll explain why below.
what is a housing bubble?
A Housing Bubble is created when there are significant price increases which are not supported by the fundamentals – the market is “full of air” due to artificially stimulated and sustained growth. Within a bubble, home values are based on something which isn’t real or extremely fragile.
The last housing crash was certainly the result of a credit-boom driven housing bubble. Currently, we’re seeing a market with record levels of equity where individuals can afford their payments because they were well qualified for their mortgages. The demographic shift is driving the severe supply and demand imbalance, which in turn is directly impacting increase to property values.
We’re actually in a period of record housing market expansion.
high school economics 101 – supply & demand
When demand is greater than supply, prices skyrocket. The intensity, or spread, of the of the imbalance is a pretty good indicator of how sharply prices will go up. In our housing market, the largest factor is the unquenched demand for homes driving up current values.
Home values will continue to rise, solid lending practices along with low interest rates and record equity levels tells us this: growth is likely to be sustained.
demand – what’s driving it?
New household formation is happening at a record high. The largest segment of the largest generation, millennials, is approaching the first-time-homebuying age of 31 between 2022-2024. This is an unprecedented level of housing that we simply don’t have.
more buyers in the space
With more and more people making the move from apartments and short term leasing to more stable and long term arrangements, it’s no wonder the housing market is seeing such a shortage in inventory. When you add in investors, foreign and domestic alike, as well as institutional investors & fund managers purchasing the properties to hold as investment property- we run into shortage problem again. It’s already a tight market being squeezed even more.
the massive paradigm shift due to the covid-19 pandemic
With mandatory lockdowns enforced to try and stem the spread of this virus in the beginning of 2020, it’s a wonder the economy didn’t completely collapse. However, the silver lining it offered was the realization that many corporations were able to come to a realization of what could be done in office, and what could be done remotely, aka at home. While we agree having “on site” staff is the best way to socialize with co-workers, it turns out having a more flexible schedule encourages people to work more efficiently and improves a company’s bottom line.
In terms of the single family homes, interest has been transferred into looking for places with extra rooms, a den, office space, room to renovate, and more. Buyers don’t mind paying a little more for the space, and/or amenities, because they now have the flexibility to work from home. It means they can live a little more comfortably, a little further away, and potentially hybridize a schedule which works for them. This translates into suburban and more rural areas simply not having the structures for these buyers who are interested – it’s a struggle the market is trying to keep up with.
To go a step further, some buyers are even able to now split their time between two places… a condo or apartment in the “city”, closer to work where they may work a couple days a week. Returning the remainder of the week to their home, further out of the metropolitan area where they enjoy better quality of life for the remainder of their week.
supply – why can’t it keep up?
America has a massive housing deficit. Despite the booming new housing construction industry (and despite inflation and lumber prices) in 2020 NAR estimated the current deficit to be between 5.5 – 6.8 million homes. Comparatively, Freddie Mac’s number was a bit lower coming in at 3.8. million.
That’s quite a significant amount of homes to be short, considering there is not enough homes for the number of households in our country. Read that again. We fall short from 3.8-6.8 million homes.
In a particularly interesting note, according to Freddie Mac Affordable Housing i.e., “starter homes”used to make up 40% of the market in 1980. Today the total number is only 7% of the market.
difficulty in creating new housing
Here’s where inflation comes into play, hard and fast. Labor shortages, construction costs, raw material costs, and lumber costs have all but brought new construction to a grinding halt over the past few years. Lumber prices have nearly tripled adding tens of thousands to the costs of finished homes, while supply chain issues have caused problems getting everything from copper, steel, windows, doors, appliances delivered within a reasonable timeframe. Add on to all this the labor force losing a lot of its tradesmen and vendors, and it’s pretty fair to say things are all over the place.
Add to this mix the problem of acquiring formerly affordable land/lots where affordable housing could have been built. Builders have to 1) protect their margins to make it profitable 2) so they can sustain their business and 3) also help the counties which desperately need new housing. With these costs going sky high, it’s hard to find incentive to build with such high risk at this time.
people just aren’t moving
There’s no place like home – and they literally mean it.
Typically first time homebuyers purchase a “starter home”, and upgrade to into more expensive housing as their family or income expands. Retirees tend to downsize as they age, or move to be closer to family members elsewhere. This is the typical “housing churn” we see, but in today’s volatile market – it’s simply not happening as often. Most people just don’t want to compete in today’s market, and as a result either choose to stay where they are, or take housing options that check far fewer boxes on their housing wish-list than they’d like.
However, the impact of mortgage forbearances and lengthy moratorium on evictions have also likely impacted the less than “normal churn” in the housing market, leaving roughly 2.2 million borrowers currently in forbearance and 11 million remaining in rentals under the the moratorium on evictions.
solid financials sustaining the housing market
Mortgage rates for a while were at record lows, allowing buyers to retain purchasing power despite rising prices and allowing more of them to afford their payments.
Qualification standards for loans are stricter than ever, thanks to the last crash. It’s safe to say, we’ve learned our lesson. Buyers are well qualified for their mortgages, with employment verification and strict income requirements put in place.
record levels of equity
Homeowners are sitting pretty through all of this – on record levels of home equity. Roughly 62% of homes in America have a mortgage. Many are securely settled, with most holding enough equity they could choose to sell their home if they had to without experiencing a net loss.
CoreLogic reports the average American homeowner gained 19.6% in equity in Q1 of 2021 from Q1 2020. That alone equates to roughly ~$33.4k, the highest annual gain per borrower in the last decade. There was an 11.4% rise recorded by CoreLogic Home Price Index in the year through March of 2021, which equates to $216k of equity growth on average for homeowners with mortgages.
Because homeowner equity has more than doubled over the past decade means a crucial financial buffer is in place to push through hardships, and the sheer amount of collapse which would have to occur to shake the footing of the financial footing of so many borrowers would be unprecedented.
cash on hand
People have cash these days – and they’re not afraid to use it. There’s certainly a case to be made for multiple cash offer scenarios, meaning the buyers must come to closing with additional cash. While you don’t necessarily want to “overpay” for a home, it’s a healthy and positive shift in the market to see people willing to pay for the house and the options they really want. Note: We’re also seeing many of these offers coming in with waived appraisal contingencies.
Consider this as well: the amount of mortgaged homeowners who took advantage of historically low rates to refinance their home over the past 18 months or so. According to Freddie Mac, on average the households who refinanced lowered their rate by 1.25% and are saving themselves roughly $2,800 a year on mortgage payments.
then what would cause a housing bubble and market crash?
With things as they are right now, it’s unlikely we’ll see either a bubble or a crash.
But we could be mistaken.
Right now we have hyper-demand, focused by stagnating new-construction and high inflation in the economy.
Now, there are a few things we should keep our eyes on to give us an indication that things may change, and it’s these:
interest rates spike
Having low interest rates is what allows individuals to continue to be able to afford homes as inflation causes prices to rise. If interest rates rise, the number of people who can no longer afford to buy a home will also increase, shrinking the pool of buyers. Any rapid increase may cause housing prices to react quickly, and would not be favorable to those seeking to enter the homeownership market.
affordability crisis
With millions of Americans looking for housing, any sharp increase in pricing will be a detriment to careful budgeting. With the largest demographic being young first time home buyers, it’s necessary to have affordable entry level housing- yet that’s precisely where our most significant shortage is. As the supply and demand imbalance drives entry level home prices up, it’s going to make it harder for these buyers to to afford the down payments or qualify for the loans needed to enter the market. This could result in more government assistance programs, loan programs, or even loan products which could further unbalance the supply/demand system.
overbuilding
Thankfully, we haven’t really hit this wall just yet…
Increased construction costs, labor and tradesmen shortages, supply chain issues and more are all contributing to the prevention of builders bringing “too much, too soon!” to the housing market.
The flip side of this would be too much housing available, a softening (or de-valuing) of home prices. Some areas may see this happen quickly, most likely urban areas where development tends to have a need and takes off like dandelions in a beautiful lawn. Builders rarely have the foresight to say “Ok, I think that’s enough for here!”, and it can quickly become too much, too soon.
Luckily – for the reasons stated above, this will be a gradual process made even slower. It’s just good to have a thought about it beforehand.
fed stops buying $40b/mo MBS
Mortgage Backed Security (MBS) is subsidized, and while most economists agree this is no longer a necessity… people tend to panic when announcements come that the Fed stops/decreseases paying _____ (insert what you like). It will likely cause some waves in interest rates should this announcement come anytime soon.
housing bubble or not?!
We say NO.
The housing market is simply not full of air (like last time).
We have fully backed mortgages, paid by vetted and committed buyers who are making payments they can afford. Most of them are situated within a thriving housing market with low interest rates.
While we believe growth will continue, there’s a good possibility that we may see it slow down a little bit. But no, it will not stop, and it will not “crash” or “burst”. That’s that for our thoughts!
What do you think?