Is The U.S. In Another Housing Bubble?

Is The U.S. In Another Housing Bubble?

Some big numbers coming out ofnthe housing market today and they’re not looking pretty ifnyou’re looking to buy or rent, it’s all getting even morenexpensive. Home prices in the US have climbed at a record pacenduring the pandemic. The median home price reached over $363,000nin June 2021, a 23.4% increase from 2020. Many of these housesnare being sold above their asking price, often entirely inncash, with bidding wars becoming the new norm to weed out thencompetition. At the beginning of the pandemic, the Fed cutninterest rates to zero and that dropped mortgage rates tonhistorical lows. And as soon as people figured out how to buy anhome in a safe manner, with like social distancing, people camenright back to the housing market. So you can see in justnbasically the last 15 months or so, we’ve seen a dramaticnacceleration in home price growth to levels we haven’t seennin decades. How hot is it? It’s turning cold. existing homensales falling in March, but at least in part, because therenjust aren’t enough homes to buy. While the market has cooled downnconsiderably in June compared to its peak, fears of a housingnbubble are becoming prevalent among many homeowners. I thinknit was sticker shock. I think a lot of people got in there andnsaid, I just can’t afford this. And that’s why home sales camendown. Almost every conversation that I’ve had over the pastndecade is, well, one, there’s this fear that we might findnourselves in another crash. And buyers don’t want to be the onesnholding the bag in the middle of that transition of a shiftingnmarket. If a housing bubble were to happen, it would mean that anvery large portion of Americans wealth are tied up in riskynassets and they can lose a lot of their wealth as soon as thosenhome prices drop. So is America currently in another housingnbubble? And what are the signs that can help investors predictnan oncoming crash? A housing bubble occurs whennstrong demand and wild speculation drive up the pricenof residential real estate to the point of collapse. It’s hardnto look at any one data indicator to know whether we’renin a housing bubble or not. The signs that I would look for arenactually more intangible kind of a mindset that people start tonadopt. If people go into buying a home thinking that they’rengoing to get this instant return. If you see a lot ofnspeculators in the market bidding up prices. If you see anlot of people or homebuyers buying homes with no money downnor very little money down. Those are some telltale signs. If you see credit too easy, thennthat can be a telltale sign as well. If a bubble is leftnunchecked supply will continue to rise in order to meet thenstrong demand and prices will climb beyond a reasonablenamount. When demand suddenly and unexpectedly decreases, it leadsnto a sharp decline in housing prices, bursting the bubble.nHousing bubbles eventually pop because people start to realizenthat what’s going on isn’t sustainable. As soon as peoplensee their neighbor selling their home or maybe their neighbornaccepts a little bit less than what homes were worth when theynbought, then they may start to get nervous and sell as well andnthen it becomes like a cascade. Bubbles tend to burst prettynquickly. That’s why, you know, one day you might have your ownngo down in value like 20% because the bubble burst. Butnsometimes the market requires a more drastic incident to crashnon a national level. Catastrophic economic events.nThat’s it, you need a catastrophic economic event tonmake a housing bubble pop, you can definitely have a pullbacknin the heat in the housing market. But to really have thatnmarket crash, there needs to be that event. There have beennnumerous housing bubbles throughout history going back asnearly as 1837. Compared to other equity busts that occur onnaverage every 13 years, it’s far less frequent. However, thenInternational Monetary Fund discovered that housing crashesnusually last nearly twice as long with output losses that arennearly twice as large, leaving a much more detrimental impact onnthe economy. The 2008 financial crisis is a prime example of howna real estate bubble could potentially contribute to anneconomic meltdown. A lot of people got a first-handnexperience in what it’s like to see your home go down in value.nSome people end up losing their homes if they weren’t able toncontinue making their mortgage payments. And then they couldn’tnsell at a higher value than what they bought it for so they’d endnup having to take the loss themselves or end up innforeclosure. So all of that can be very damaging to people and Inthink it’s very understandable that people are concerned aboutnthat happening again. Demand off the charts, prices rising at thenfastest pace in 15 years. But is the market too hot? Is itnoverheating? A bubble as they say? So is the recent realnestate rush a sign of a housing bubble? According to mostnexperts, the market is shaping up to look more like a boomnrather than a bubble. I don’t expect that we’re going to see a housenprice crash. I don’t think we’re in a bubble. We say bubblenbecause we can’t believe how much prices have gone up. Butnreally a bubble tends to be something that’s inflated thatncould burst at any minute and change. And that’s not reallynthe case here. While speculation certainly is a factor, the mainncause for today’s demand is in the low mortgage rates. At thn start of the pandemic in Marc 2020, the 30 year fixed-ratn mortgage set at 3.45%. In Jul 2021, that number had dropped tn 2.87%. We’ve got 30 year fixe -rate mortgage rates for much on the last several months belo 3%. That’s a phenomenal raten It’s rock bottom. It’s record ow. I don’t see them going anynlower. But that is one of the easons why that has led to thisnpickup in demand to buy homes nd has added the fuel necessary no push home prices up. Supply is also an issue. According to the national Association of Realtors the US has under built itsnhousing needs by at least 5.5 million units over the past 2n years. That’s a stark compariso to the previous housing bubble nn 2008 when overbuilding was th issue. In my town, which is Marnlehead, Massachusetts, as of this morning, we had 17 singln family homes on the market. 17 And that’s not even cnnsidered bad. Some of the s rrounding towns, the town next noor, they have five single amily homes. So we’ve got neally the demand and supply orces coming together. We’ve not a boost in demand that’s ueled by record low mortgage nates and we’ve got a shrinkage o supply as many of the older honeowners decided to postpone li ting their home for sale and wain until a later date when the pan emic was in the history boons. So between more demand les supply, prices are up. And then are up at the fastest pace sinc the 1970s. There also haven’t been any signs of a lend ng bubble, which is often assoniated with housing busts. Most of the new mortgages today are nixed-rate compared to the risk er adjustable-rate mortnages in the past. Subprime loan are those loans made to borrnwers or to applicants who have very, very low credit scorns. Those are gone from the mark tplace. What’s also gone are nhe ‘liar loans’. Just about al of the mortgages today are funly documented – documenting ncome, documenting employment,ndocumenting financial assets so that both the borrower and the lender have some assuranc that the borrower has the financial capability to manage t at mortgage over time. Furthermnre, rapidly rising home prices s w a correction in June 2021, afner sales of newly built homes dr pped to the lowest level since the early days of the pand mic in April 2020. I think itnwas sticker shock. I think a ot of people got in there ann said, I just can’t afford t is and that’s why home sales camn down. We did see some more supp y come onto the market ann that’s helpful. That’s a lot o sellers saying, “Well, if thisnis the height of the market, I want to get in now.” But agann, they’re not going to get that top dollar if people can’tnafford it. So I think we’re t kind of a turning point as in nhe housing market is cooling d wn on sales but prices may stny elevated if we don’t get enou h supply in there to meet the cunrent demand, which does still xist. The US might be safe from anhousing bubble at the moment ut that doesn’t mean another nrash will never happen again. ut there are certain indicators nhat could signal danger on the orizon. What would be unusual wnere you should fear about ome prices really startinn to plummet is if you look ar und and you see all thisnnew construction in our neighborhood and yet hnme prices aren’t moderating at ll despite there being all tnis added inventory. If you se a whole lot of flips, a lotnof investors coming in, doing modest improvements to the home nnd then getting a whole lot m re than they put in when they nnd up selling. That would be a ign that the housing marken is starting to look a littl bit unhealthy. While the thougnt of another crash is certa nly scary, experts say that n real estate crash similar to th one during the 2008 finannial crisis is unlikely to occur again. The market today is not in danger of a housing bubbl bursting, because everynne out there who owns a home as a mortgage that was undernritten responsibly. Some of th se changes were due to the Dodd-nrank Act, which also then creat d the Consumer Financial Protention Bureau and through some f the regulations that have neen promulgated, that has rea ly assured that mortgages arenunderwritten in a prudent fas ion and provide for mortgages that can lead tonsustainable home ownership or the home buyer over time. Butnfor both current and potential homeowners that remain worriedn there are certain measures tha can be taken to lessen the riskn If you’re a home buyer today and you’re concerned that pricen are overheating and you’r buying at the top of the marketn the most important thing yo should do is not overpay fon your house. If you feel th price is higher than what you’rn comfortable with, higher th n what you think the true economnc value of the home is then s ep back from it. You don’t neednto buy now. The mindset that I w uld encourage homeowners to havn is a very long-term mindset. t doesn’t really matter if home nalues go down for a couple of ears if you’re gonna hold and not sell for a decade. So I ould just keep your eye on thenlong term goals. Make sure that ou have enough savings thnt you could keep paying you mortgage payment, even if yon lost a job, even if you lost ome income so you can ride out nny temporary dip in the housi g market.
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Is The U.S. In Another Housing Bubble?

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