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Bubble Trouble: The upcoming “Bubble Burst” is mythical at best

This is part five of Inman’s Bubble Trouble series on the U.S. housing market in 2021. Don’t miss yesterday’s counterpoint to this essay: The housing crash will be worse than I predicted.

At face value, I can confidently see why some are concerned about how much house prices have risen – not just during the pandemic, but since house prices rebounded in 2012.

Home price growth has long outpaced wage growth. Average prices have risen by more than 113 percent since January 2012, while wages have only increased by a much more modest 30 percent.

Previous installments in Inman’s Bubble Trouble series:
• Bubble Trouble: Is the market on a collision course with a disaster?
• Bubble Trouble: How agents deal with customer anxiety in the middle of bubble talk
• Bubble Trouble: 4 stats that give you hope (and 4 that don’t)
• Bladder problem: The apartment crash will be even worse than I predicted

In addition, prices rose more than 9 percent in 2020 and rose a record 17.2 percent between March 2020 and March 2021. As a result, the murmur of the impending bursting of a new housing bubble can now be heard far and wide in the United States.

I would first like to address those who believe that fate is on the horizon. I’m afraid I have bad news. it’s not going to happen.

While it is easy to argue that such a rapid rise in house prices is sure to end badly – as in 2008 and 2009 – it would be wrong to merge these two periods. Today’s real estate market is very different from what we saw in the 2000s.

Allow me to explain why.

For more than six years we have suffered a sad shortage of homes to buy in the United States and nearly 10 million new homes are being added at the same time. Obviously, not every new household became a new homeowner, but given demographic growth and persistent inventory shortages, it was enough to tilt the balance between supply and demand, resulting in rapidly increasing home values.

Why are there so few houses for sale?

This is probably one of the questions I get asked the most. The first reason is that Americans don’t move as often as they used to, which is limiting what is on offer. In the early 2000s, we moved an average of every four years, but today it’s more than eight years. If fewer households are handled, supply remains scarce and prices rise.

The next thing we need to consider is the new home market, which can balance supply with demand if enough homes are built. In recent years, however, the number of newly built homes has been well below the level needed to create a balanced market.

In addition, the continued rise in the cost of building materials has resulted in more expensive homes being built that do not meet the lower end of the market that is most in demand.

So far, the scenarios described above are completely opposite to those of the late 2000s, but there are several other reasons why we are in a very different place today than before the bubble.

Similar to the current market, the demand for housing was very strong in the 2000s, but a key difference between the two markets is that much of the demand back then wasn’t really real – and certainly not sustainable.

Tenants became homeowners in record numbers and people were snapping up investment properties that, frankly, should never have been allowed. Lending policies were so lax that qualifying for a home was far too easy, which ultimately was the main reason a housing bubble formed and then burst.

Without a doubt, the most significant difference between today’s market and that of the 2000s is poor credit quality, but the era of “low-doc” or “no-doc” loans that allowed buyers to essentially balance their income are over to qualify for a mortgage.

In 2020, according to Ellie Mae, 70 percent of mortgages went to borrowers with a proven FICO score above 760, and the average credit score over the past five years was a very high 754.

While subprime lending still exists – and there is a decent place to do it – the percentage of borrowers with a credit score below 620 was just 2 percent last year. For comparison purposes, it was 13 percent in 2007.

It’s also worth noting that in 2004 a full 35 percent of mortgages were ARMs, or so-called “teaser loans”. When the interest rate on these loans fell, many homeowners were forced into foreclosure because they could no longer afford the monthly payment. To date, the share of ARM in March 2021 was only 2.4 percent.

Finally, I want to research mortgage credit availability, and the Mortgage Bankers Association has some very extensive data on it. The MBA index, which is calculated using various factors related to borrower eligibility (credit score, type of loan, credit-to-value ratio, etc.), is a very useful indicator of the health of the property market.

Although the index has risen since last fall (suggesting more freely available credit), it is still 85 percent below its 2006 level, suggesting lenders remain cautious.

The bottom line is that credit quality and down payments are far higher today than they were in the days before the bubble, and the supply of mortgage credit remains very tight compared to before the real estate collapse.

So far I don’t see any connection with the “bad old days” – do I?

It is irrefutable that house prices have risen well above average for a number of years, and that is cause for concern, but not because of an impending bubble. Rather, what worries me is the impact of rising prices on the affordability of housing.

Current homeowners are in good shape and according to the recent Federal Reserve USA financial accounts. It currently has over $ 21 trillion in equity reportedly.

Additionally, the latest data from Attom Data Solutions shows that over 30 percent of homeowners had at least 50 percent equity in their homes at the end of last year. However, this does not help first-time buyers who are so important to the long-term health of the property market.

Remember, there is a wave of first-time buyers. 9.6 million millennials will be turning 30 in the next two years, and Gen Z is on their heels. Given today’s prices, the question should be, where can they afford to buy?

This is, in my opinion, a far bigger problem than the bursting of a mythical bubble.

Matthew Gardner is Chief Economist at Windermere Real Estate, the country’s second largest regional real estate company.

Previous installments in Inman’s Bubble Trouble series:
• Bubble Trouble: Is the market on a collision course with a disaster?
• Bubble Trouble: How agents deal with customer anxiety in the middle of bubble talk
• Bubble Trouble: 4 stats that give you hope (and 4 that don’t)
• Bladder problem: The apartment crash will be even worse than I predicted


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