Are We In A Housing Bubble?
The 2020 real estate market took almost everyone by surprise. Everyone expected the real estate market to crash due to the coronavirus pandemic. Many prognosticators expected us to experience a housing crash similar to what happened in 2008. The logic behind these predictions had to do with the economic fallout of the pandemic. People expected the pandemic to shutdown industries, which happened. They then expected many people to lose their jobs, which also happened. It was then expected that millions of Americans would fall behind on their mortgages, which happened too. So why didn’t this result in a market crash? A combination of forbearance extensions, foreclosure moratoriums and increased demand for home purchases led to a housing boom instead of a market crash. Home prices increased across the United States in 2020. This has some asking whether or not we are in the midst of a real estate market bubble.
What is a Market Bubble?
Before we discuss whether or not we are in the middle of a real estate market bubble, it is important to discuss what a market bubble is. A housing bubble, or real estate bubble, is a market in which prices dramatically increase driven by spiking demand, limited supply and a bunch of speculation. Housing bubbles eventually pop, which causes the price of homes to come crashing down and usually has devastating ripple effects on the economy and individual wealth. There are aspects to today’s rising home prices that seem to fit this definition of a real estate bubble. Demand is certainly increasing and supply is absolutely limited. However, by diving deeper into the causes of today’s rising real estate prices reveals that what is happening is not a bubble. Instead, what you are witnessing is a normal market process that will not come crashing down on the heads of homeowners.
Housing Supply Trends Prove It’s Not a Bubble
In order for our current market to be described as a bubble the supply of houses needs to increase sharply. That is not going to happen. Housing inventory hit record lows in 2020. This will not improve over the next year. Inventory of homes available for purchase was severely limited by the pandemic. When the pandemic first started, many new home projects were delayed because of restrictions designed to slow the spread of the virus. Even as construction resumed, it was still slower than pre-pandemic times. Social distancing requirements make construction more difficult.
Additionally, the cost of building materials has increased. The pandemic and a host of natural disasters has caused a lumber shortage. The supply of lumber is down for many of the same reasons that construction has stalled for new housing projects. Safety regulations and social distancing requirements means that it is taking longer to process the lumber. At the same time, the demand for lumber has skyrocketed. Many homeowners have undergone a number of remodeling projects. Homeowners are flush with equity because of the rising house prices, so they are able to pursue home upgrades that they have wanted for a long time. Record breaking wildfires and hurricanes have also increased the demand for lumber. Every home that has been harmed by one of these disasters needs lumber to rebuild. All of this has created a perfect storm where lumber is hard to get and expensive.
All of this together means that the supply of homes will not increase much over the next year. This means that we cannot be in a market bubble. If a bunch of new homes are not added to the market, then there will not be a significant drop in house prices.
The Demand for Buying New Homes Proves It’s Not a Bubble
The demand for new houses is real and not going away. On some level, the rising demand for new home purchases during the real estate bubble that crashed in 2008 was artificial. Regulations were lax on subprime mortgages and adjustable rate mortgages. This meant that individuals who would not normally be able to qualify for a mortgage were able to acquire one. People did not need to prove that they actually had the income to afford mortgage payments in order to qualify for a mortgage. There was a large demand for new homes because anybody could get one whether or not they were in a position to afford one.This is not the case with the current spike in demand.
The rising demand for people buying a house has everything to do with historically low mortgage rates. Today’s mortgage rates make buying a home an incredible investment for anyone with the means to do it. Low rates save you thousands or tens of thousands of dollars over the life of a home loan. Potential homebuyers know this and are not letting these rates slip away without buying the house of their dreams. Mortgage rates are at these historic lows because the Federal Reserve slashed interest rates in order to protect against the economic fallout of the pandemic. As our nation starts to rebound, rates will go up. However, they will not go up to the point in the near future where potential homebuyers will be deterred. Locking in a mortgage sometime in the next year will be a great investment even if rates begin to creep up. Stable demand for new houses means that we are not in a bubble. As long as people want to buy houses, prices will not fall.
Millions of Homeowners with Equity Prove It’s Not a Bubble
The final piece of data that proves we are not in a real estate bubble is that a vast majority of homeowners have a lot of equity. The 2008 housing crisis happened because large amounts of homeowners were underwater on their mortgages once prices dropped slightly. Simply put, they owed more on their mortgage than their house was worth. That is not the case right now. According to data from the Census Bureau, over 38% of homeowners own their homes outright. Another 30% of homeowners are considered “equity-rich”, meaning they owe less than half the amount their house is worth. Even if prices drop, a vast majority of homeowners will not be forced in a position to short-sell their homes, which prevents the prices from tumbling.
Final Thoughts
Today’s real estate market is nothing like 2008. The Great Recession was such a traumatic experience for our nation that it is understandable that many people are worried that we will see a repeat. Although the pandemic has severely impacted our nation’s economy, the house market is nowhere near a situation like we were in last decade. Today’s rising home values make perfect sense when you factor in low mortgage rates and a short supply of homes.
More than anything, today’s real estate market shows how much of a value it is to buy a house. Many people think of buying a home and taking out a mortgage as taking on debt. However, that is not the right way to look at things. Buying a home is a way to build wealth. As you pay your mortgage and pay down the principal, you build equity. Equity is an asset. Equity builds even faster as the price of houses increases. As your home increases its value, you get more equity because the amount you owe on your mortgage doesn’t increase along with its value.
The bottom line is that you should not be scared away from buying a home because of the ghosts of 2008. Instead, you should look to take advantage of today’s market and today’s low mortgage rates. If you dream of owning a home and want to see if you qualify for a mortgage, contact us! Our independent mortgage brokers will do everything in our power to help make your dream of buying a house a reality.
