Some big numbers coming out of the housing market today and
they're not looking pretty if you're looking to buy or rent,
it's all getting even more expensive. Home prices in the US
have climbed at a record pace during the pandemic. The median
home price reached over $363,000 in June 2021, a 23.4% increase
from 2020. Many of these houses are being sold above their
asking price, often entirely in cash, with bidding wars becoming
the new norm to weed out the competition. At the beginning of
the pandemic, the Fed cut interest rates to zero and that
dropped mortgage rates to historical lows. And as soon as
people figured out how to buy a home in a safe manner, with like
social distancing, people came right back to the housing
market. So you can see in just basically the last 15 months or
so, we've seen a dramatic acceleration in home price
growth to levels we haven't seen in decades. How hot is it? It's
turning cold. existing home sales falling in March, but at
least in part, because there just aren't enough homes to buy.
While the market has cooled down considerably in June compared to
its peak, fears of a housing bubble are becoming prevalent
among many homeowners. I think it was sticker shock. I think a
lot of people got in there and said, I just can't afford this.
And that's why home sales came down. Almost every conversation
that I've had over the past decade is, well, one, there's
this fear that we might find ourselves in another crash. And
buyers don't want to be the ones holding the bag in the middle of
that transition of a shifting market. If a housing bubble were
to happen, it would mean that a very large portion of Americans
wealth are tied up in risky assets and they can lose a lot
of their wealth as soon as those home prices drop. So is America
currently in another housing bubble? And what are the signs
that can help investors predict an oncoming crash?
A housing bubble occurs when strong demand and wild
speculation drive up the price of residential real estate to
the point of collapse. It's hard to look at any one data
indicator to know whether we're in a housing bubble or not. The
signs that I would look for are actually more intangible kind of
a mindset that people start to adopt. If people go into buying
a home thinking that they're going to get this instant
return. If you see a lot of speculators in the market
bidding up prices. If you see a lot of people or homebuyers
buying homes with no money down or very little money down. Those
are some telltale signs.
If you see credit too easy, then that can be a telltale sign as
well. If a bubble is left unchecked supply will continue
to rise in order to meet the strong demand and prices will
climb beyond a reasonable amount. When demand suddenly and
unexpectedly decreases, it leads to a sharp decline in housing
prices, bursting the bubble. Housing bubbles eventually pop
because people start to realize that what's going on isn't
sustainable. As soon as people see their neighbor selling their
home or maybe their neighbor accepts a little bit less than
what homes were worth when they bought, then they may start to
get nervous and sell as well and then it becomes like a cascade.
Bubbles tend to burst pretty quickly. That's why, you know,
one day you might have your own go down in value like 20%
because the bubble burst. But sometimes the market requires a
more drastic incident to crash on a national level.
Catastrophic economic events. That's it, you need a
catastrophic economic event to make a housing bubble pop, you
can definitely have a pullback in the heat in the housing
market. But to really have that market crash, there needs to be
that event. There have been numerous housing bubbles
throughout history going back as early as 1837. Compared to other
equity busts that occur on average every 13 years, it's far
less frequent. However, the International Monetary Fund
discovered that housing crashes usually last nearly twice as
long with output losses that are nearly twice as large, leaving a
much more detrimental impact on the economy. The 2008 financial
crisis is a prime example of how a real estate bubble could
potentially contribute to an economic meltdown. A lot of
people got a first-hand experience in what it's like to
see your home go down in value. Some people end up losing their
homes if they weren't able to continue making their mortgage
payments. And then they couldn't sell at a higher value than what
they bought it for so they'd end up having to take the loss
themselves or end up in foreclosure. So all of that can
be very damaging to people and I think it's very understandable
that people are concerned about that happening again. Demand off
the charts, prices rising at the fastest pace in 15 years. But is
the market too hot? Is it overheating? A bubble as they
say? So is the recent real estate rush a sign of a housing
bubble? According to most experts, the market is shaping
up to look more like a boom rather than a bubble. I don't
expect
that we're going to see a house price crash. I don't think we're
in a bubble. We say bubble because we can't believe how
much prices have gone up. But really a bubble tends to be
something that's inflated that could burst at any minute and
change. And that's not really the case here. While speculation
certainly is a factor, the main cause for today's demand is in
the low mortgage rates. At th start of the pandemic in Marc
2020, the 30 year fixed-rat mortgage set at 3.45%. In Jul
2021, that number had dropped t 2.87%. We've got 30 year fixe
-rate mortgage rates for much o the last several months belo
3%. That's a phenomenal rate It's rock bottom. It's record
ow. I don't see them going any lower. But that is one of the
easons why that has led to this pickup in demand to buy homes
nd has added the fuel necessary o push home prices up. Supply is
also an issue. According to the ational Association of Realtors
the US has under built its housing needs by at least 5.5
million units over the past 2 years. That's a stark compariso
to the previous housing bubble n 2008 when overbuilding was th
issue. In my town, which is Mar lehead, Massachusetts, as
of this morning, we had 17 singl family homes on the market. 17
And that's not even c nsidered bad. Some of the s
rrounding towns, the town next oor, they have five single
amily homes. So we've got eally the demand and supply
orces coming together. We've ot a boost in demand that's
ueled by record low mortgage ates and we've got a shrinkage o
supply as many of the older ho eowners decided to postpone li
ting their home for sale and wai until a later date when the pan
emic was in the history boo s. So between more demand les
supply, prices are up. And the are up at the fastest pace sinc
the 1970s. There also have 't been any signs of a lend
ng bubble, which is often asso iated with housing busts. Most
of the new mortgages today are ixed-rate compared to the risk
er adjustable-rate mort ages in the past. Subprime loan
are those loans made to borr wers or to applicants who have
very, very low credit scor s. Those are gone from the mark
tplace. What's also gone are he 'liar loans'. Just about al
of the mortgages today are fu ly documented - documenting
ncome, documenting employment, documenting financial assets so
that both the borrower a d the lender have some assuranc
that the borrower has the fina cial capability to manage t
at mortgage over time. Furtherm re, rapidly rising home prices s
w a correction in June 2021, af er sales of newly built homes dr
pped to the lowest level si ce the early days of the pand
mic in April 2020. I think it was sticker shock. I think a
ot of people got in there an said, I just can't afford t
is and that's why home sales cam down. We did see some more supp
y come onto the market an that's helpful. That's a lot o
sellers saying, "Well, if this is the height of the market, I
want to get in now." But aga n, they're not going to get
that top dollar if people can't afford it. So I think we're
t kind of a turning point as in he housing market is cooling d
wn on sales but prices may st y elevated if we don't get enou
h supply in there to meet the cu rent demand, which does still
xist.
The US might be safe from a housing bubble at the moment
ut that doesn't mean another rash will never happen again.
ut there are certain indicators hat could signal danger on the
orizon. What would be unusual w ere you should fear about
ome prices really startin to plummet is if you look ar
und and you see all this new construction in
our neighborhood and yet h me prices aren't moderating at
ll despite there being all t is added inventory. If you se
a whole lot of flips, a lot of investors coming in, doing
modest improvements to the home nd then getting a whole lot m
re than they put in when they nd up selling. That would be a
ign that the housing marke is starting to look a littl
bit unhealthy. While the thoug t of another crash is certa
nly scary, experts say that real estate crash similar to th
one during the 2008 finan ial crisis is unlikely to occur
again. The market today is not i danger of a housing bubbl
bursting, because every ne out there who owns a home
as a mortgage that was under ritten responsibly. Some of th
se changes were due to the Dodd- rank Act, which also then creat
d the Consumer Financial Prote tion Bureau and through some
f the regulations that have een promulgated, that has rea
ly assured that mortgages are underwritten in a prudent fas
ion and provide
for mortgages that can lead to sustainable home ownership or
the home buyer over time. But for both current and potential
homeowners that remain worried there are certain measures tha
can be taken to lessen the risk If you're a home buyer today
and you're concerned that price are overheating and you'r
buying at the top of the market the most important thing yo
should do is not overpay fo your house. If you feel th
price is higher than what you'r comfortable with, higher th
n what you think the true econom c value of the home is then s
ep back from it. You don't need to buy now. The mindset that I w
uld encourage homeowners to hav is a very long-term mindset.
t doesn't really matter if home alues go down for a couple of
ears if you're gonna hold and ot sell for a decade. So I
ould just keep your eye on the long term goals. Make sure that
ou have enough savings th t you could keep paying you
mortgage payment, even if yo lost a job, even if you lost
ome income so you can ride out ny temporary dip in the housi
g market.