The question of whether the real estate market is a bubble ready to pop seems to be dominating a lot of conversations – and everyone has an opinion. Yet, when it comes down to it, the opinions that carry the most weight are the ones based on experience and expertise.
Talk to almost any expert, and they will say the housing market is not in a bubble, despite soaring home prices across the country. As housing prices continue to escalate, some buyers may be waiting for the fever to break and prices to plummet. Overall, the feeling among experts is, while those buyers may be in for a disappointment, there could be a smaller price correction on the horizon.
Ali Wolf, chief economist at housing the research firm, Zonda states, “Homebuyers today are purchasing for many healthy reasons: Low-interest rates, more flexibility to work from home and increased saving are all rational reasons for buying a house. The frenzy fueled by these factors, combined with fear of missing out, has the potential to create a bubble though.”
But Wolf also points out that all housing bubbles do not look or end like the one in 2008. While this housing market is supported by strong fundamentals such as low inventory, high demand, and a risk-averse lending environment, extreme spikes in home prices could result in some prices rolling back in the near future.
This could be a cautionary warning for anyone who is thinking about making a real estate investment for only a year or two. While a correction may not look like it did in 2008, where many buyers needed at least a decade to recover the value of their investment, even a small correction could take several years.
Another “expert” comment came from Ed Pinto, director of the American Enterprise Institute (AEI) Housing Center. He suggests that post COVID lifestyles contribute to escalating home prices because the new “work-from-home” model allows those workers to move from more expensive markets to more affordable places, driving home prices up there. While that explanation may not seem to include our relatively costly market, the idea of post-COVID mobility does apply. We see a fair amount of money coming into our market from inland areas because that mobility allows buyers to work and live in a more desirable location.
But again, what we have said in previous posts still rings true. While we could see a market “adjustment” coming, the main driver in the 2008 crash was the mortgage industry’s lending standards.
According to Peter Coy, the Economics Editor for Bloomberg Business Week, “There’s one very big difference between then and now, though: Mortgage loans are much harder to get… Lenders have raised lending standards even beyond the requirements of the Dodd-Frank Act of 2010, which was passed in response to the financial crisis… only about 0.1% of mortgage loans issued this year carry adjustable rates, compared with about 60% in the bubble years. So, homeowners today won’t be shaken out of their homes by rising rates.”
One contributing factor in the ultra-low number of adjustable-rate mortgages is likely the already low-interest rates. Mr. Coy also suggests that the one risk to the current market might be a sharp jump in those low rates. But that is a manageable factor considered by the Federal Reserve. While rates are increasing, they are expected to come up slowly. Currently, at about 3%, rates are expected to be 3.5% by the end of 2021 and close to 4% by mid-2022. So, though sub-3% rates are pretty much behind us, buyers will be well-qualified and will enter into their purchase, knowing precisely what their payments will be in the future.
The bottom line here is that those in the know seem to be saying that it is doubtful there will be a crash in the real estate industry. Home values may correct back slightly, but the only reasons for escalating home prices in this current market are supply, demand, and low-interest rates. The current real estate market may not be your market if you only intend to live in your new home for only a couple of years. But if you get that sub-4% interest rates were historic lows not so long ago, and prices are not going to bottom out, now could still be your time.