Reasons why we are not in a housing bubble
Appreciation averaged about 5.5% in 2020, and they’re forecasting nother five percent appreciation this year. Which leads to the question...are we going into a bubble. Here are three reasons why this market is totally different than the one a little over a decade ago
1. Housing supply is extremely low
Price is always determined by supply and demand. If supply is high and demand is low, prices normally decrease. If supply is low and demand is high, prices naturally increase. In real estate, supply and demand are measured in “months’ supply of inventory,” which is based on the number of current homes for sale compared to the number of buyers in the market. The normal months’ supply of inventory for the market is about 6 months. Anything above that defines a buyers’ market, indicating prices will soften. Anything below that defines a sellers Market which prices normally appreciate.
Between 2006 and 2008, the months’ supply of inventory increased from just over 5 months to 11 months. The months’ supply was over 7 months in twenty-seven of those thirty-six months, yet home values continued to rise.
Current inventory has been under 5 months for the last 3 years, under 4 for thirteen of the last fourteen months, under 3 for the last six months, and currently stands at 1.9 months – a historic low. Remember, if supply is low and demand is high, prices increase.
2. Housing demand is real
During the housing boom in the mid-2000s, there was a lot of speculators and got caught up in a frenzy based on unrealistic belief that housing values would continue to escalate. Even as inventory levels rose.
The mortgage industry fed into the crazy. Making it easy for anyone to get a mortgage with programs like stated income or no documented loans.
In the current real estate market, demand is real, not fabricated. Millennials, the largest generation in the country, have come of age to marry and have children, which are two major drivers for homeownership. The health crisis is also challenging every household to redefine the meaning of “home” and to re-evaluate whether their current home meets that new definition. This desire to own, coupled with historically low mortgage rates, makes purchasing a home today a strong, sound financial decision. Therefore, today’s demand is very real. Remember, if supply is low and demand is high, prices naturally increase.
3. This time, households have plenty of equity
In the housing boom of early 2000, it wasn’t just buyers who got caught up in the frenzy. Existing homeowners started using their homes like ATM machines. There were a lot of cash-out refinances, which enabled homeowners to leverage the equity in their homes. Leaving Many homeowners with little or no equity in their homes at a critical time. As prices began to drop, some homeowners found themselves in a negative equity situation where the mortgage was higher than the value of their home. Many defaulted on their payments, which led to an avalanche of foreclosures.
Today, the banks and the American people have shown they learned a valuable lesson from the housing crash of a decade ago. Cash-out refinance volume over the last three years was less than a third of what it was compared to the 3 years leading up to the crash.
This conservative approach has created levels of equity never seen before. According to Census Bureau data, over 38% of owner-occupied housing units are owned ‘free and clear’ (without any mortgage).
ATTOM Solutions says “17.8 million residential properties in the United States were considered equity-rich, meaning that the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value…The count of equity-rich properties in the fourth quarter of 2020 represented 30.2 percent, or about one in three, of the 59 million mortgaged homes in the United States.”
Let’s add the 38% of homes that are owned free and clear with 18.7% of all homes that have at least 50% equity (30.2% of the remaining 62% with a mortgage), meaning 56.7% of all homes in this country have a minimum of 50% equity. That is significantly better than the equity situation in 2008.
Take Away from this post!
Housing supply is at a historic low. Demand is real and rightly motivated. Even if there were to be a drop in prices, homeowners have enough equity to be able to weather a dip in home values and not walk away from their homes. This is nothing like 2008. In fact, it is the exact opposite
