Is This a Housing Bubble? Don't Wait for It to Pop - Here is Why
We are always worried about bubbles and rightfully so. When markets get out of control, it can really be devastating. Lise Howe has summarized why our current market is very different than the market just before the Great Recession. There is limited supply, high demand from well qualified buyers, interest rates are historically low and current homeowners have a lot of equity. It is remarkable, but over 55% of homeowners have at least 50% equity in their home.
It is Always Something
Are there potential problems ahead? There always is something. What if interest rates do go up? We have watched as rates have gone steadily down since 1980. It has been a very long move down. What happens if there is a meaningful rise in rates? I have worried about rates rising for years and have been very wrong. Still, if rates rise there will be repercussions. It could affect housing prices, but is there a bubble? For the reasons that Lise Howe has articulated, I do not think so. I think the real worry is in the bond market. Small changes up in interest rates can create real downward movements in bond prices. If there are any bubbles out there, I think it is in the bond market? Keep in mind my caution above, I have been wrong on that one for awhile now.
What do you think? Do you see any market bubbles or is it smooth sailing ahead?
Do you think when you consider this housing market that we are at the edge of the cliff and that the market must surely fall apart? Everything you read about this housing market tells you that it is red hot. Homes are flying off the market after their owners have reviewed 5, 10, 15 or even 50 offers. This resulted in approximately a 10 percent increase in home values in 2020, with another five percent projected for 2021.
This has some voicing concern that we may be in another housing bubble like the one we experienced a little over a decade ago. Some are just concerned about the trajectory of the market while others are sure that if they just wait a year, the market will tank. Here are three reasons why this market is totally different and waiting will not necessarily be rewarded.
1. This time, housing supply is extremely limited
The price of any market item is 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 seller's market in 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.
Months' 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 percent nationwide – a historic low. In Maryland, supply is at 1 month, and in some areas only 2 weeks.
When supply is low and demand is high, prices naturally increase.
2. This time, housing demand is real
During the housing boom in the mid-2000s, there was what Robert Schiller, a fellow at the Yale School of Management’s International Center for Finance, called irrational exuberance. Schiller defined the term as unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors. Without considering historic market trends, people got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate.
This is not unique to real estate. Did you ever hear of Tulip mania, a period during the Dutch Golden Age when contract prices for some fashionable tulips reached extraordinarily high levels, and then dramatically collapsed in February 1637.
The mortgage industry fed into this craziness by making mortgage money available to just about anyone, as shown in the Mortgage Credit Availability Index (MCAI) published by the Mortgage Bankers Association. The higher the index, the easier it is to get a mortgage; the lower the index, the more difficult it is to obtain one. Prior to the housing boom, the index stood just below 400. In 2006, the index hit an all-time high of over 868. Again, just about anyone could get a mortgage. Today, the index stands at 122.5, which is well below even the pre-boom level.
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
Again, during the housing boom, it wasn't just purchasers who got caught up in the frenzy. Existing homeowners started using their homes like ATM machines. There was a wave of cash-out refinances, which enabled homeowners to leverage the equity in their homes. From 2005 through 2007, Americans pulled out $824 billion dollars in equity. That left 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 clearly remember that lesson from the 2008 housing crisis. 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 the Census Bureau, over 38% of owner-occupied housing units are owned ‘free and clear' (without any mortgage). Also, ATTOM Data Solutions just released their fourth quarter 2020 U.S. Home Equity Report, which revealed:
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.
If we combine the 38% of homes that are owned free and clear with the 18.7% of all homes that have at least 50% equity (30.2% of the remaining 62% with a mortgage), we realize that 56.7% of all homes in this country have a minimum of 50% equity. That's significantly better than the equity situation in 2008.
Bottom Line
Housing values are cyclical. Prices rise and prices drop over time. The real issue is timing. How long do you want to wait for prices to drop? If they rise for another year, will they drop to the level they are at right now or will there be a year over year increase even with the drop? No one can tell. When is the right time to buy a home? The answer always is - when you need one.
What is clear is that this time, 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. This is nothing like 2008. In fact, it's the exact opposite.
If you are looking for a home in the DC metro area, you know there is more to the process than just picking a property and making an offer. You need to find the best location for your wants and needs, get a great price, and work with a lender who will make your life easier - not harder. Trust your search with a Realtor who is licensed in DC, MD and VA and really knows the city and all its secret neighborhoods.
Start your search with the Lise Howe Group, Washington Natives who love the city and all its quirkiness! If you are moving or relocating to Washington DC, be sure to ask for our relocation guide. Call us at 240-401-5577 to schedule an appointment or email us at lise@lisehowe.com. Too excited to wait to talk to us about a great home? Just click here to start that home search.
If you want to see what is for sale in Washington DC, Chevy Chase and Bethesda, check out these links below:
Bethesda Single Family Luxury Homes
Bethesda Single Family Homes Under $1 Million
Chevy Chase Single Family Luxury Homes
Chevy Chase Single Family Homes Under $1 Million
Luxury Single Family Washington DC Homes
Washington DC Single Family Homes Under $1 Million
Lise Howe
Keller Williams Capital Properties
4646 40th St NW
Washington DC 20016
240-401-5577 (24 hour direct)
Licensed in DC, MD, and VA
Associate Broker, GRI, ABR, CRS
The Lise Howe Group
Howe Real Estate Should Be!
www.lisehowegroup.com
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