3 Reasons We’re Definitely Not in a Housing Bubble

By
Real Estate Agent with Smart Way America Realty AB067859

3 Reasons We’re Definitely Not in a Housing Bubble

Home values appreciated by about ten percent in 2020, and they’re forecast to appreciate by about five percent this year. This has some voicing concern that we may be in another housing bubble like the one we experienced a little over a decade ago. Here are three reasons why this market is totally different.

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 sellers’ 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 months – a historic low.

Remember, if 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.” The definition of the term is, “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.

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 have shown they learned a valuable lesson from the housing crisis a little over 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). 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

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.

Contact Kris Collis, your Trusted Pro in the Poconos, now that you’re ready to buy or sell, maybe both, for professional results in all market fluctuations. It’s a great time to take advantage of your position.  Low mortgage rates lead the way. With years of area knowledge and repeat clients from trusted service and personalized guidance each step of the way, let’s connect today to see how you benefit from opportunities in the Poconos and surrounding counties. We are also in demand as a perfect remote location for work.


Welcome to the Poconos!


Courtesy: KCM

Posted by

Your Trusted Pro in the Poconos, Professional Results You Expect 

Kris Collis, Associate Broker

Smart Way America Realty

East Stroudsburg, PA 18301

Client Endorsements

570-801-5525

buysellpocono@gmail.com

Comments (6)

Richard Weeks
Dallas, TX
REALTOR®, Broker

Great information, thanks for sharing.  I hope you have a great day.

Mar 01, 2021 01:37 AM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

Good morning, Kris Collis, Associate Broker our business has always been dictated by supply and demand.... you clearly described the current market across the counrty....  this will change, at some point, to a level market.

Mar 01, 2021 03:50 AM
Kris Collis, Associate Broker

So true Barbara, no matter the market fluctuations, there is always a real estate market ascending, descending or somewhere in between.

Mar 01, 2021 08:31 PM
Paul S. Henderson, REALTOR®, CRS
Fathom Realty Washington LLC - Tacoma, WA
South Puget Sound Washington Agent/Broker!

Thank you for sharing your thoughts about a housing bubble. I do think it really is very regional in our state Kris Collis, Associate Broker 

Mar 01, 2021 08:27 AM
Kris Collis, Associate Broker

So true Paul, real estate is always local.

Apr 04, 2021 12:21 AM
Sheri Sperry - MCNE®
Coldwell Banker Realty - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

Hi Kris Collis, Associate Broker - Great stuff! This is so true. The Dodd-Frank act has also put some regs into play to help eliminate the bubble effect. 

Mar 01, 2021 05:07 PM
Kris Collis, Associate Broker

Good point Sheri, all in all our markets are in a much better place now for all these reasons.

Apr 04, 2021 12:24 AM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

I think we’re heading toward the boom of sorts with all of culture once this pandemic ends!

Mar 01, 2021 09:46 PM
Kris Collis, Associate Broker

Absolutely Laura, and now that April's here, we're seeing the boom you mention.

Apr 04, 2021 12:22 AM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Sheri Sperry - MCNE® Agreed! I might’ve missed this one before but I’m glad I found it!

Mar 01, 2021 09:46 PM