"Are we in a housing bubble?"
This is undoubtedly one of the most frequently asked questions lately, and also one of the most-Googled nationally. As people reflect on the soaring home prices and market frenzy of the mid-2000's, it's natural to question how long the current market pace can sustain itself. After all, most of us remember the housing bubble and the economic devastation of the consequential crash that happened around 2007-2008. If you've been worried about a repeat crash, we have good news - this is not a bubble!
Although the housing market is undeniably hot, leading economists agree that a crash is not looming on the horizon. There were several causes that contributed to the last housing bubble that are not in play this time. Factors like low (or no) down payments, sub-par (and even predatory) lending practices, and an oversupply of homes each played their part in the crash of '07-'08, but are not present it today's market. In the last housing market crash, down payments were extremely low (or non-existent), and many people chose adjustable-rate mortgages to be able to afford a higher purchase price with a lower monthly payment. Once these flexible mortgage rates began to increase, many buyers could not afford the payments. However, they also could not sell their homes for enough to pay off their mortgages in full due to falling home prices. These combined factors created a runaway market crash, pock-marked with foreclosures and short sales everywhere you looked.
Conversely, the 2021 housing market is characterized by the severe lack of housing inventory combined with soaring buyer demand - this means we will not likely over-build/over-supply the demand anytime soon. Additionally, down payments are up - in 2007, 45% of first-time buyers financed 100% of their home, compared to just 17% in 2020; likewise, the number of adjustable-rate mortgages has decreased from 15% in 2007 to just 4% in 2020. Lending restrictions tightened significantly after the crash, and they remain strict today, which means it is much harder to qualify for a mortgage you can't actually afford. Foreclosure filings were at a 15-year low in February 2020 (before pandemic forbearance assistance ever went into effect).*
Even as the market starts to cool and stabilize, there will still be many "second-chance" buyers waiting to get back into the game. These "second-chance" buyers are the ones who were either bumped out of competing with so many over-listing-price offers, or ones who simply chose to wait for things to slow down a bit because they didn't have to move. The back-log of second-chance buyers is significant, so the demand should sustain at a stable rate for a considerable time.
We are thrilled that there are significant differences between the 2007 and 2021 markets, and that these differences bode well for homeowners, homebuyers, and the country overall. Since the real estate industry significantly impacts the national economy, it is good news for the US as a whole.
*Data derived from Brian Buffini's 2021 Real Estate Report - US Edition
