The current real estate market has home values increasing at rates that we haven’t seen since the pre-crash 2007 levels. For those that lived through that crash, it raises many red flags that possibly this current real estate market is a bubble as well? This is causing hesitation in some buyers as they are actually hoping for a repeat so that they can swoop in and purchase real estate on sale. However, unfortunately for them I don’t believe this current market is in a bubble, my reasons are outlined below.
- Inventory is extremely low right now. Many markets don’t have more than 2 months’ worth of available inventory. Economics 101 teaches us that when there is low supply and high demand, prices are bound to increase as buyers outbid each other for the few homes that are listed. Another way to look at this is, if we had normal inventory and home values/prices remained ever increasing at a rapid rate, then that would be more likely a sign that a bubble is inflating.
- Interest rates are still near historically low levels. When the cost to borrow money is less expensive, that creates more buying power for buyers. Meaning the lower the interest rates equals a larger shopping budget for buyers. In addition, they can afford to bid up homes up if they choose to. Even an interest rate swing of ±0.5% can have a dramatic change to buyers’ purchasing power.
- The last crash was a result of lenders allowing anyone with a pulse to get a mortgage without even having to show proof that they were qualified to receive the loan. Since then laws have made lending regulations and checks on buyers much more stringent. Take a peek at the chart below to compare the credit scores of borrowers from 2007 vs. 2020. The amount of highly qualified borrowers far exceeds everyone else.
4. Covid19, surprisingly has caused the real estate industry to boom instead of bust as most would have thought. As many jobs shifted from in the office to work from home and students learning from home. Many homeowners and renters quickly found that their home was insufficient and promptly went shopping for a home that would be more suitable. Some employers have found that they’re saving so much money from not having a physical office, their employees are now permanently working remote. In the midst of Covid19, there was a huge buying spree.
5. The unemployment rate is coming back down. We’re currently at 6.1% unemployment as of April 2021. With the deployment of the vaccine many of the businesses that were majorly affected: entertainment, restaurant, travel, and hospitality are all coming back online. Many flights are back to being full and a number of businesses are now lifting mask requirements. If we’re able to minimize Covid, the economy should be back to normal soon.
6. New construction challenges, even before Covid, new construction was still relatively stagnant as seen by the chart from the US Census below. New construction dropped off severely around 2006 and never quite returned to anywhere near those levels since. Due to the extremely low inventory of existing homes, this has caused a huge demand in new construction all of a sudden. However, new construction cannot keep up with the demand. Currently builders are facing a shortage in labor and material costs. Slow moving permits to begin new construction is also a big factor. So it will be a while before builders can help with the overall low inventory problem. For now, builders are in the driver’s seat and can charge buyers premiums on homes as they see fit.
In summary, for these reasons discussed above, I don’t believe we’re currently in a bubble or at risk for a crash like 2007. If anything, possibly a small home value correction as more inventory comes online competition, prices and competition will come down a bit. Interest rates would need to jump significantly to make an impact on home values and that is not likely to happen in a short period of time. I believe what we’re seeing is actually a market shift in home values. Meaning home values will only continue to increase from here on out. The reason for this is still historically low interest rates along with inflation by all the money that the Fed introduced into the economy. So If you’re waiting on the sidelines to purchase next year because you’re hoping prices will come down. You only need to look at what happened last year compared to this year. Buyers that opted to wait it out last year due to what was a hot market and uncertainty of where it was headed. Fast forward to today, the market is even more insane. Home prices, competition, and interest rates are all up. Last year a buyer might have been able to lock in rates in the 2’s, now rates are in the low 3’s, and possibly next year high 3’s. New construction is no better, as those costs are literally through the roof due lumber shortage, prices have soared. Lastly, in certain markets, where a huge influx of population is migrating like California to Texas or New York to Florida. Those states that are gaining population at these rapid rates, real estate in those markets are only going to be moving in one direction from here on out.