Steve Robbins, Partner at Highgarden Real Estate takes a deep dive in helping you explain to your clients why another housing bubble is not likely to happen.

Is there a housing bubble that is going to burst? 

In the last month, the Google search, “When is the housing market going to crash?” is up 2450%!  It’s a fair question when, according to Redfin, 42% of homes nationally are selling for more than list price.  And it feels like 42% is even low, doesn’t it?

The Google search, “How much over asking price should I offer on a home in 2021?” was up 350% in the first week of April.  Is it nice that homebuyers are starting to understand reality?  Yes.  Is this still a little crazy though?  Yes!  In March, the national median price was up 17% from a year ago to $353,000 per Redfin.  Also last month, the national median price for new listings was up 15.6% year-over-year to $370,000 for an all-time high according to Realtor.com.  Home prices are appreciating at an accelerated rate so fear of a crash is reasonable, particularly if you were around during the Great Recession. 

All that said, it’s different this time.  By and large, this is a simple exercise in supply and demand.  We have been dealing with a supply shortage for years, but that was somewhat offset by relatively moderate demand.  Now, housing inventory is more limited than ever and demand is spiking back toward pre-meltdown levels.

Here are some highlights of each dynamic…

Housing Supply – Why aren’t there more listings??

• Institutional and private investors have been gobbling up homes – “Smart” money has been snatching up inventory for over a decade, and it’s not slowing down.  Investors are buying an estimated 20% of all homes in the US.  In some cities, it’s closer to 30%.  Real estate is viewed as a safe investment with a better yield than treasuries, and with a better hedge against inflation to boot.

• Super low interest rate – Most homeowners are enjoying fixed interest rates in the 3s or even 2s.  “We just refinanced so let’s not mess with it.”

• Aging in Place – Boomers are living in their homes longer than ever due to better health and longer lifespans

• Many homeowners updated their homes during Covid – Why move now?

• New home construction has lagged since the Great Recession – It’s estimated that homebuilders have under-built by 3.8 million homes in the last decade.  Why?

o   Banks were very gun shy to finance new development projects for years after the meltdown

o   Land – Prices have escalated, zoning has become more and more restrictive

o   Labor – The industry has been slow to find and bring back reliable production staff

o   Regulatory fees – According to the National Association of Homebuilders, regulatory fees can account for 25% of the final price

o   Material costs – These have skyrocketed since Covid.  Supply chain issues, tariffs and the initial expectation of reduced demand has undercut the builders’ ability to ramp up.  Lumber pricing is up 300% after being relatively flat for a decade.

Housing Demand – Where did all these homebuyers come from??

Historically low interest rates – “They won’t be getting any lower so we should buy now.”
 

• Covid changed the opportunity for many to work from home – No longer needing to commute so moving out to the suburbs or maybe some place more affordable

• Flyover states, like Indiana, are a more affordable alternative than the coasts so people are moving there

• Investors are aggressively focused on real estate for wealth building and as an inflation hedge

• iBuyers are gearing back up as those models fight for control of housing inventory

• Finding a nice and easy rental opportunity isn’t much easier than finding one to buy

• Household formation – This to me is key:  Zillow estimates there are 5.7 million households that have been delayed in forming – Millennials, the largest generation in US history, are moving into peak homebuying age

• In 2006, housing affordability, meaning what percentage of the population could afford a median-priced home, was 26%.  Today the affordability rate is 61% despite the recent appreciation.  Lower interest rates, better income, etc.

• Demand has not been artificialized by easy lending like last time – Pre-meltdown mortgage loan borrowers had a 760+ credit score 31% of the time.  In 2020, 71% of borrowers had a 760+ score.

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Will there be a huge surge of foreclosures like last time?  Maybe some, but nothing like 2008-2012.

• Back then, 30% of homes were underwater, now it’s only 3%.

• Back then, banks were doing 125% LTV loans, No Income/No Asset Verification loans, etc.  Times have changed.

• Today over 60% of homes have a greater than 50% equity position in their home.  In Q3 of 2020, the average family with a mortgage had $194,000 in home equity.

• Loan forbearances due to Covid are being worked through – Most banks are adding deferred payments to the back end of the loan, not some kind of balloon payment due at the end of the moratorium.  They don’t want the REOs and there is political pressure to be as accommodating as possible.

Is there a bubble that will burst?  Unlikely.  How residential real estate evolves will vary by location, but without an unforeseen event changing everything again, the simple economic forces at play wouldn’t seem to allow a steep price crash.  There just aren’t anywhere near enough homes for all the people needing them.  That isn’t going to change anytime soon.

As prices and interest rates rise, demand will curb, affordability will wane, and the market will move closer to an equilibrium.  Sales volume and home prices would likely stagnate at that point.

To keep housing affordable and sales volume steady, we will need to build more homes.  It’s easy to argue that government incentives should be considered to help spur new home construction.  For the overall health of our industry, we should be making it easier to build more new homes right now, not more difficult.  Go hug your favorite homebuilder.  We need them.