Are We In a Housing Bubble?

The National Association of Realtors (NAR) reported that the median price of an existing home nationwide rose 16.9% in 2021, reaching $346,900. This marks 118 consecutive months of year-over-year gains. The trend has extended into 2022 as home prices continue to climb, all while home inventory reaches record lows, according to the NAR. Our small and somewhat isolated island market is certainly no exception. Sellers continue to enjoy multiple offer scenarios while buyers are practically putting on their boxing gloves.

The combination of astronomical sale prices and a tight market may prompt some to speculate that we’re floating upward in a housing bubble. Indeed, the trends are starting to raise more than a few eyebrows.

What is a BUBBLE?

A housing bubble is characterized by a significant spike in home prices that is unrelated to other economic fundamentals, such as labor markets, income, or wealth. A bubble develops when real estate demand outpaces supply, causing the average sale price to rise (often at an alarming rate). No two housing bubbles are alike when it comes to their economic impact, duration, and number of homeowners affected.

Despite the outward appearance of the times, most real estate pundits aren’t quite ready to make the assumption that we’re in a bubble. The relevant economics are complicated (of course), but there are a few considerations to suggest we’re not there yet. These are:

• Stricter lending standards. Trillions of dollars and millions of homes were lost in the last collapse, with a large part being attributed to easy credit extended to people who couldn’t really afford it. By accepting low- and no-down payment mortgages as well as balloon and ARM deals, buyers would readily find themselves unable to make their monthly payments and end up in foreclosure.

Credit standards are much higher at present. Scrupulous qualification of mortgage applicants prevents buyers who can’t afford to own a home from obtaining a loan.

• Rising interest rates. In order to fight inflation, the Federal Reserve recently raised interest rates by 0.25%. The feds are signaling three additional hikes throughout the remainder of 2022. This will in all likelihood result in higher rates for mortgages as well.

If mortgage rates rise above 5% for instance, a large portion of buyers will be effectually priced-out of the market. The higher rates could also curb investor activity, the latter of which accounts for a major portion of today’s home sales.

• Foreclosures at a record low. One of the hallmarks of the housing debacle in the Great Recession was the foreclosure crisis. Millions of homes were lost by people who couldn’t pay their mortgages, increasing home inventory in a market with little demand.

We aren’t seeing anything like that currently. After quickly recovering from the pandemic’s first few months of economic mayhem, 2021 came to a close with the number of foreclosures at an all-time low.

• Soaring housing demand and equity. The NAR says sales of existing homes totaled 6.12 million in 2021, up 8.5% in a year and the most since 2006 (just prior to the housing bust). Inventory of unsold existing homes was at an all-time low of 910,000 as we commenced 2022, which qualifies for about 1.8 months of inventory (the lowest since 1999 according to the NAR). This translates to a high-demand situation without a quick fix in sight as builders can’t make much headway to satisfy the heavy obligation.

One of the largest factors in the catastrophe of the last housing bust was the lack of homeowner equity. This combined with a record number of home equity loans created a scenario in which thousands of homeowners found themselves upside-down in their mortgages (since they owed more than their homes were worth). Many foreclosures and short-sales followed, further depreciating home values nationwide.

Today’s equity picture is much different. Escalating appreciation over the past twelve months alone gave homeowners an average of $55,300 in equity (NAR). This positive perspective puts the current housing market in a much stronger place, minimizing risk of foreclosure and stabilizing home values across the U.S.

• A strong job market. According to a recent report released by the Labor Department, the U.S. economy added 199,000 jobs in February 2022 while the unemployment rate fell 0.3 percentage points (to 3.9%) from January. Economists surveyed by Reuters expected payroll gains of $400,000. Wages are rising as companies compete for people to fill available positions. All of these numbers translate into good news for those of us seeking employment.

The combination of these factors serve to reassure us that we’re not likely to repeat the last big housing crash. That said, it’s always a good idea to prepared in the event that we find ourselves in a housing bubble. Here are some tips to keep you protected:

• Don’t overextend yourself financially; obtain a mortgage that you can afford now and in the future
• Secure the best interest rate and loan program by researching multiple lending institutions
• Determine if have the option of entering mortgage forbearance
• Consider refinancing your home before mortgage rates rise in the future
• Conduct extensive due diligence on any possible real estate purchase
• Perform meticulous financial planning and budgeting to include best- and worst-case scenarios