Is This A Housing Bubble?
As real estate prices continue to increase and demand exceeds supply for the foreseeable future, the market will be slightly dysfunctional. However, because of the increase in prices and the flight to real estate as an inflation hedge, many people are calling for a housing bubble. While these thoughts could be valid in some markets, the overall housing market is most likely not in a bubble.
Real estate is considered a scarcity asset, meaning there is a limited supply. When there is a limited supply of something that is sought after by so many, prices increase to balance out supply with demand. This is called finding an equilibrium price, where buyers are satisfied paying what they are, and sellers still feel like they are in control. With mortgage rates increasing, buyer demand will decrease and hopefully prices will find a new balance. Here is why we are not in a housing bubble.
Housing Affordability Is Better
According to a recent survey conducted by the National Association of Realtors, most consumers believe that we are in a housing bubble. However, the market, while expensive, is significantly different than it was in the late 2000s. One of the biggest reason as to why the housing market is not as out-of-touch with reality like it was in the Financial Crisis is because people can still afford homes. Because affordability is dependent on wages, home prices, and mortgage rates, it is easy to see why homes are affordable. In fact, rates are still below the 10-year average, even as they soared to start 2022.
According to conventional lending practices, a household should not spend more than 28% of their gross monthly income on housing. With wages being much higher than they were 15 years ago, this is a lot easier to obtain. Home prices in the Financial Crisis were also significantly higher if you factor in wage-to-price in that time-frame. Today, mortgage rates are almost 2.5% lower, with wages being at all-time highs. More of your income can be used at a lower rate nowadays, and home prices are more reasonable comparatively. According to the latest Affordability Report by ATTOM Data,
“The average wage earner can still afford the typical home across the U.S., but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward.”
Mortgage Standards Led To A Housing Bubble
In the Financial Crisis and the housing bubble that caused it, it was much easier to get one or more loans. There is the running joke in the real estate world that calls these loans NINJA loans. NINJA loans stands for no income, no job, no asset loans. Nowadays, it is nearly impossible to obtain a home without income, a job, or assets to act as collateral. During the housing bubble, mortgages were granted to people with sub-620 credit scores. A sub-620 credit score is considered a risk and a poor user of credit in today’s market. According to credit.org,
“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”
This was not the case in 2008. Not only were people more likely to get approved with poor credit, but people were also using the ARM (adjustable-rate-mortgage). Borrowers with a lower credit score can still qualify for a loan. However, they are considered risky and do not qualify for nearly as much as they did in the Crisis.
The Foreclosure Situation
We have talked about this before on our blog, but the foreclosure situation is significantly different than years before. The most obvious difference from 2008 to now is the number of homeowners facing foreclosure. In fact, that number has actually dropped lower, even after the removal of the foreclosure moratorium. The Federal Reserve and its economist release a monthly report that shows consumers that are new into the foreclosure process. There is no doubt that the early pandemic numbers were helped by the forbearance. However, today there are less people in the foreclosure process, and many of them are able to work out payment plans with their banks.
“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”
Foreclosures are way less common than they were 15 years ago for a few reasons. One important reason is that people were immediately drawing from their equity lines in their homes. This was fine and many people made money through equity quickly like in today’s market. However, once prices began to fall and equity dried up, the dominos started to tumble. Many homeowners were unable to pay their multiple mortgages when everything caught up to the market. This led to many foreclosures and short sales, as once affluent-on-paper homeowners decided to leave their properties all-together. According to the latest Homeowner Equity Insight by CoreLogic,
“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”
Supply During A Housing Bubble
Finally, the true backbone of the historic real estate market we have seen: supply. Housing inventory continues to hit record lows, and sales of existing home sales somehow still hit one-year highs. The supply of new and existing homes has never been lower, unlike that of the housing bubble. In fact, there is less than 1/4th of the homes on the market today than there was in the housing crash.
For those who follow economics or have some sort of education in it, supply always dictates price. For assets that are limit in supply and high in demand, prices typically increase. Anything under 6 months of supply is considered a tight real estate market. In the housing crash, there was over 7 months of supply throughout it all. Dating back to 2018, there has been less than 4 months of supply. The market has been this competitive for a long time, and with rates at record lows, it is no surprise.
For those predicting a crash, it might be smart to hold off on those predictions. Even the boy who cried wolf was eventually right, but until then, real estate will thrive. In fact, experts are predicting the 2022 market to be just as crazy as the 2021 and 2020 markets. Watch out for the everyday Facebook economist making bold predictions about the housing market they know nothing about.