Housing Bubble?

The word on the street is that we are experiencing a housing bubble & it’s about to pop! But is this true? Let’s discuss….

When a “housing bubble” is referenced, it generally means unsustainable housing price growth generated by unnatural demand. The most recent example of this would be the 2007-2009 “Great Recession” which saw housing foreclosures reach over 3.5 million. Many people attribute the high foreclosure rate to job loss. However, this wasn’t the case. Predatory lending, no money down mortgages and “no document” loans (where individuals don’t have to show proof of their income before receiving a mortgage) were the root cause. In essence, excessive borrowing fueled that housing market boom. Many of these homeowners were underwater on their loans, with no equity to fall back on. So, when over-extended homeowners experienced job loss or other financial stressors, they had no choice but to allow the bank to foreclose.

Flash forward to today. When many of us see these sky-rocketing housing prices, we get “Great Recession” flashbacks. According to Odeta Kushi, Deputy Chief Economist for First American Title, this isn’t the same situation at all. Kushi relates this to a number of reasons:

  • Excessive borrowing isn’t fueling this housing market boom

  • The high price appreciation we are seeing isn’t the same as a “bubble”

  • Today’s mortgage standards are extremely strict (largely due to reforms from those predatory loans)

  • Mortgage debt to income levels are near a 4 decade low, with equity at a historic high

Kushi believes that what we are seeing in today’s housing market boils down to supply and demand. This is the result of the perfect storm of circumstances. Due to the Covid-19 pandemic, many employers are now allowing their employees to work from home indefinitely. This gives workers more geographic flexibility to move anywhere in the country. Millennials are also aging into prime home buying years. The aging generation is also living longer & staying in their homes. Our construction industry has also never recovered from the “Great Recession”, with new construction being under built for demand since 2009. In short- we have a housing shortage which drives up demand, and therefore housing prices along with it.

So where do we go from here? Will housing princes continue to rise? Worse- will housing prices fall? Odeta Kushi doesn’t see either happening. Kushi believes that with the slow rise of mortgage interest rates, this will determine affordability of homes. Basically, less people will be able to purchase homes & the demand will fall. Kushi believes that as buyers pull back from the market, sellers will adjust their price, and housing prices will adjust accordingly. This does *not* mean that home prices will fall, more that they will level out.

Where does this leave our current homeowners and hopeful home buyers? The time to act is now. The longer a potential buyer waits to obtain a loan, the higher the interest rate they will get on their mortgage. Give us a call if you have questions on this market, or would like some advice on how this impacts you. Our team is always here to help!


Liz



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