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Are we in a housing bubble?
Key points
- 77% of home buyers and 44% of real estate agents believe there is a real estate bubble.
- The root cause of the price surge is mainly due to supply and demand.
- By comparison, the 2007 housing crisis was fueled by predatory lending and loose lending practices.
Home values in the United States have increased by more than 35% in the past two years, including a 20.9% increase in the past 12 months. On the average selling price of homes sold chart, the line is considerably steeper than the rise before the 2008 financial crisis. After home prices peaked in the first quarter of 2007, home prices plunged 20 %.
It’s easy to see similarities between what’s happening in today’s housing market and the housing market crisis of 2007 that triggered the “Great Recession”. In a recent Redfin survey, 77% of home buyers and 44% of real estate agents believe there is a real estate bubble. However, there are many differences between today’s housing market and that of 15 years ago. Here’s why experts think you shouldn’t worry about a housing bubble.
Low supply and high demand
Low interest rates, growing demand and shrinking supply have caused house prices to soar. The National Association of Realtors estimates that nearly one million renter households have been shut out of the housing market. As a result, the share of first-time buyers fell to 26%, an eight-year low.
On top of that, the number of entry-level homes — properties 1,400 square feet or less — is at its lowest level in five decades. Start-up homes accounted for 40% of new construction in 1980. In 2020, they accounted for only 7% of new construction. As a result, housing affordability has become a significant issue.
The pandemic, supply chain issues and now the crisis in Ukraine have exacerbated home inventories by extending construction times. It also further increased the prices of materials needed to build new homes. Compared to the financial crisis of 2008, the main reason why prices have increased significantly is the low supply of available and new homes, combined with high demand.
Changing Lending Practices
The main driver of the house price boom in the mid-2000s was easy money and subprime lending practices. A congressional commission found that the roots of the Great Recession were due to lenders making loans “that they knew borrowers could not afford and that could result in massive losses for mortgage-backed securities investors.” .
They found that underwriters violated its already lenient lending standards by engaging in predatory lending, document fraud and, in some cases, criminal behavior. A Senate investigation concluded that risky loans “were the fuel that triggered the financial crisis”.
Since then, there has been a lot more scrutiny in the housing industry. Adjustable rate mortgages with lump sum payments are much less common. It is much more difficult to speculate in the real estate market today. Most mortgages today are 30 year mortgages with no risk of a steep increase in payments with interest rate increases.
Will housing prices go down?
There are signs of a slowdown in the housing market. After a banner year for home prices, home sales are beginning to slow as mortgage rates rise and high home prices impact demand. The Federal Reserve has raised interest rates three times this year and said further interest rate hikes are expected later this year to curb inflation.
Home ownership is becoming increasingly out of reach for many Americans as high interest rates collide with record high prices. The housing market is expected to return to pre-pandemic inventory levels by 2024. Demand is still high and in times of high inflation, home ownership is seen as an inflation hedge.
“Most existing homeowners are sheltered from high mortgage rates, thanks to the fact that more than 90% of loans in recent years were vanilla, fully amortized fixed rate mortgages,” according to an article published by Zillow. “It keeps people’s current bills affordable and will prevent a wave of foreclosures like the one that helped send the housing market spiraling out of control and crashing in 2008.”
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