Are We Experiencing A Housing Bubble?

Are We Experiencing A Housing Bubble?

Surging prices, bidding wars, low inventory and low interest rates leave many of us wondering if we might be headed for another market crash in the next year or two.  The old adage, “What goes up must come down!” and the crash of 2006-09 still very much on our minds leaves a very unsettled feeling. 

But, let’s analyze.

The downturn of the early 2000’s was fueled by low interest rates, loose mortgage lending tactics and a record rise in home values year over year.  When that bubble burst, approximately 9 million Americans lost their homes to foreclosure or short sales.  Housing values plunged by 30% and it took nearly a decade for a full recovery. 

Experts today find a similar collapse would be unlikely.  Consider these circumstances today:

• Stiff Lending Practices:  Federal regulations imposed after the great recession fundamentally changed the mortgage lending industry.  The process of qualifying for a mortgage requires a much stricter review of income, credit and assets; and lenders who do not comply now suffer heavy penalties.  For this reason, those who purchase a property using a mortgage are much more likely to be able to weather any housing shift.

• Pandemic Mortgage Forbearance:  Our government has been very proactive from the start of the pandemic to put in place programs to protect those who might lose their jobs because of the pandemic.  As of March 2021, 2.6 million homeowners’ mortgages were in such forbearance plans. As the economy has recovered, many homeowners have resumed their employment, and their home payments. According to CoreLogic, by the end of 2020, overall mortgage delinquencies declined 5.8% due to the forbearance program. The share of mortgages 60 to 89 days past due declined to 0.5%, lower than 0.6% in December 2019.

• Home Equity:  As a result of stiffer mortgage lending practices and slowly increasing home values over the last decade, most homeowners have a cushion in the equity of their property (the difference between the current home value and what is owed in loans).  This is in vast contrast with 2009 when  ¼ of U.S. homeowners who had a mortgage on their property were faced with owning a home that was valued at less than the amount they owed.

• Price Growth Is Slowing:  While we are still seeing price increases, our real estate professionals are already sharing that they are seeing a slow down in appreciation.  The surge in sales during the pandemic was unexpected but can be partially attributed to consumers on lockdown and confined to their homes realizing that their property might not fit their needs for new work from home and remote schooling practices.  As the nation has opened up, these concerns have lessened.

While no one can make a prediction with complete accuracy, based on the above factors the Homebuyer’s Institute has reported that it seems highly unlikely that housing prices in the U.S. will drop in 2022. In fact, recent forecasts predicted that home values would continue to climb through this year and into next.  However, many analysts do expect to see smaller price gains next year, compared to 2020 and the first half of 2021:

• In their April 2021 forecast, Freddie Mac’s research team predicted that U.S. home prices will rise more slowly in 2022 compared to this year and last. By their estimation, house values nationwide rose by 11.3% during 2020. They predict a gain of 6.6% for 2021. Looking ahead, the group predicted that U.S. home prices would rise by 4.4% during 2022.

• Property data and analytics company CoreLogic made a similar prediction to Freddie Mac’s long-range forecast above. The company reported that home prices in the U.S. rose by 11.3% from March 2020 to March 2021. Looking forward, they expect prices to rise by just 3.5% from March 2021 to March 2022.

• A recent Reuters poll of 40 housing analysts suggested that house values in the U.S. will rise more slowly in 2022. The surveyed analysts estimated that values would rise by 10.6% this year, followed by a gain of 5.6% in 2022.  According to the Reuters report: “Beyond this year, U.S. house prices were forecast to moderate and average 5.6% growth next year and 4.0% in 2023.”

• National Association of Realtors chief economist Lawrence Yun estimated that the housing market will downshift next year. As Yun stated in May: “With more inventory and some easing in demand, home prices are expected to shift to mid-single-digit appreciation by the fourth quarter and in 2022.”

• The research team at Zillow are more optimistic.  In May 2021, the company’s website stated: “United States home values have gone up 11.6% over the past year and Zillow predicts they will rise 11.8% in the next year.”

• According to Realtor.com, the decline in time-on-market has slowed, indicating that some properties are sitting on listing portals for a little longer. These market trends point to a positive development for buyers and an easing of double digit price increases.

It goes without saying that the past year has been extraordinarily strong in the real estate market.  While it is impossible to predict, many factors including low housing supplies, an increase in millennial buyers and low mortgage rates, point to the fact that market increases may cool a bit, but they will continue to appreciate steadily.