Are We in a Housing Bubble?


With some conditions of the 2008 housing crisis present today, some are concerned this means we are heading for another bursting housing bubble. However, most economists believe conditions are not conducive to that. Below are six reasons why you shouldn't worry about a pending housing crash.

1. Inventory is too low.


Though many think interest rates are the primary factor driving the prices of homes, low inventory remains the critical component. In the housing market right now, supply is dwindling to 20-year lows. In 2008, before the dreaded housing crisis, the inventory numbers were very different.


Months Supply in April 2008 - 11.3

Months Supply in April 2022 - 1.6


All data from The Gulf South Real Estate Information Network. InfoSparks© 2022 ShowingTime.


Homes for Sale April 2008 - 12,032

Homes for Sale April 2022 - 2,234

All data from The Gulf South Real Estate Information Network. InfoSparks© 2022 ShowingTime.


In a Lance Lamber article from FORTUNE:

"As long as inventory levels remain near four-decade lows, Devyn Bachman, vice president of research at John Burns Real Estate Consulting, tells Fortune it will be hard for the housing market to return to a normalized level of growth. That sentiment is shared widely among housing economists, who point to inventory as the key metric for determining when the unprecedented housing boom will finally cool down."

2. Lenders have more strict regulations.

In the years leading up to the 2008 financial crisis, the mortgage lending sector was akin to the wild west. There was so little regulation and enforcement that risky ventures seemed almost encouraged. Since then several items of legislation were created including the Dodd-Frank Act.


A Forbes Advisor article explains "… the Dodd-Frank Wall Street Reform and Consumer

Protection Act sought to restore stability and oversight to the financial system and prevent a repeat of the crisis…"


The following were the results of the Dodd-Frank Act:

1. The Financial Stability Oversight Council (FSOC)

2. Banking Industry Stress Tests

3. The Consumer Financial Protection Bureau

4. The Volcker Rule

5. Monitoring Risky Derivatives

6. Strengthening the Sarbanes-Oxley Act

7. Requiring Hedge Funds to Register with the SEC

8. Federal Insurance Office (FIO)

9. SEC Office of Credit Ratings


Daniel Kline's article for The Street states, "In 2008 banks made it very easy for pretty much anyone to get a mortgage. Credit standards were low overall and people with decent-to-good credit could get lo loans without the bank verifying their income or their assets." With all these new layers of protection, consumers can feel more confident in the lending sector.



3. There is a lower percentage of first-time buyers.


Fewer inexperienced buyers are in the marketplace. In 2008 first-time homeowners made up over half of the market share. Today, they are less than 30%.


“Record-high home prices and low inventory were already making things hard for first-time homebuyers,” says Chris Arnold in an article for NPR.


Graph from: https://magazine.realtor/news-and-commentary/economy/article/2022/04/calmer-market-ahead


"Investors are coming in and pushing out the first-time buyers," says Lawrence Yun, chief economist for the National Association of Realtors. With rising interest rates and more cash buyers entering the market, we could see that trend increasing.


4. The majority of homeowners have plenty of equity.


Another layer of protection against a crisis like the one in 2008 is that homeowner's equity is on the rise. According to an article from Business Insider: “With more than $3.2 trillion in home equity gained in 2021 alone, and nominal median household incomes approximately 40% higher than 2006, homeowners concerned with mounting housing costs can just sell their properties — and that means a foreclosure wave is unlikely anytime soon.” - Alcynna Lloyd (Business Insider)


5. The unemployment rate is low.


When people are employed they have more power to secure financing and purchase real estate. When the unemployment rate is lower, consumers tend to spend more and put more into the economy. In fact, the unemployment rate could be lower. Many Americans have quit their jobs and have found other ways to supplement their income since the COVID-19 pandemic.

With employment opportunities available, it seems unlikely to see the same conditions as those in 2008 when foreclosures and unemployment made the perfect storm for a housing crisis.


6. The foreclosure rate is low.


Speaking of the foreclosure rate, "Mortgage delinquency rates in January reached a 23-year low." says Connie Kim from housingwire.com. She goes on to say that because equity has grown so much over the last few years, it is unlikely that an owner wouldn't be able to sell their property (or short sell at the very least).


 

As always, I want my clients to have as much of the best information out there to make their real estate decisions. For any and all real estate needs or questions, please feel free to contact me on my cell phone at 504-432-0263 or via email at chuck@gnorealty.com.

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