Is there a housing bubble?

Many homeowners, homebuyers and investors are worried about a market collapse similar to the one that triggered the Great Recession 2008, 2009, 2010.

We rely on Ali Wolf Chief Economist for Zonda, Ben Keys Wharton Business Daily and Fannie Mae among other sources we routinely review. 

What is a housing bubble?

Wikipedia defines 

A housing bubble, or real estate bubble, as a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse.

What causes a crash?

When asset prices are falling faster than fundamentals 

Home prices on the rise do not solely constitute a housing bubble.

Let’s quickly cover the fundamentals  

A) housing prices

B) the supply of homes

C) loan standards past and present

D) unhealthy signs in the market today contrasted against the last housing cycle

What caused prices to rise?

The Pandemic caused new entrants into the market including renters and House Hunters who wanted to Change Living arrangements and work from home

Homebuilders tightened the supply of homes to be cautious about over producing during the pandemic.

Couple this with a housing supply already pressured by high demand before the pandemic.  

This supply mis-match pushed prices even higher.  S&P market increases of 31% (making people cash rich from their holdings) and an increase in home equity of 20% provided plenty of wealth for consumers to migrate from higher cost areas like CA or NY to lower cost ones like TX.

Let’s move on to Lending practices

Loose loan standards - strict requirements for good credit, and  sizable down payments contrast this with prior lending practices which allowed

a) subprime mortgages -what’s that? a type of loan granted to individuals with poor credit scores—640 or less, or below 600 due to deficient credit histories

b) adjustable interest rates with low entry level rates Currently this represents less than 5% of purchase and refinanced loans but during the last real estate cycle it was over 35% 

c) other questionable lending practices including those related to construction

What else caused the last market bust?

A huge supply of homes on the market in early 2000’s.  We were totally overbuilt.  

Contrast this with the current building shortage (specifically what’s going on in Austin)

In 2021, We are under not overbuilt.

Over the last 10 years in Austin we’ve attracted hundreds of firms seeking our strong labor pool and high demand. This supply-demand mis-match cannot resolve itself quickly. SIDEBAR- We are keeping our eyes fixed how quickly builder inventory that has just turned up around town gets absorbed.

Homebuilding is expensive making it more difficult for developers make a profit on housing for the more modest purchasers.  This means the supply will continue to be constrained.  

Home price to income ratio.  

When we look at the prior bust, this measure of affordability

Levels are below the last cycle.

Mortgage rates at or below 3% creating spending power.

UNHEALTHY SIGNS

The fear from buyers that they will miss out has caused prices to spike and some rash decisions during bidding wars and price spiking.

THERE ARE MORTGAGE SAFETY NETS IN PLACE including stronger credit worthiness, higher downpayments, Lending practices that are speculative - is not prevalent in today’s market as it was during the last bust.

RISKS TO HOUSING INCLUDE A RISE IN INTEREST RATES

Fannie Mae in its October economic forecast expects the 30-year fixed rate mortgage to average 3.3% in 2022, up from 3.1% projected last month. 

EMPLOYMENT homebuyers require stable jobs

THE ECONOMY AND CONSUMER CONFIDENCE

WHAT PEOPLE THINK - about the economy and markets could also contribute to prices flattening but it’s  nothing compared to the prior housing bust.

In our next podcast we will talk about a few ideas to raise the value of your home in 2022.