ARE WE ON THE VERGE OF A HOUSING BUBBLE?
Are we on the verge of a housing bubble? Are we nearing a catastrophe like 2008? These are questions that I have heard several times throughout the past few weeks, so I wanted to address them.
First, let me say that these are logical questions and concerns, considering the rise in home values we have experienced. While it appears there are similarities between the now and then, we do have stark differences that should help alleviate some concern.
Home price appreciation averaged somewhere around 10% last year nationwide. Locally, these numbers are slightly different depending on location, but for the purpose of explaining what’s taking place, we will stick to a broader perspective.
Knowing that we experienced higher than normal appreciation, the question becomes, is it sustainable? The answer is no, but the key here is that these numbers are expected to normalize. If we average out third party economist projections, we are likely to see appreciation rates around 5% this year which is slightly above the normalized rate of 3.8%. This will be a result of additional inventory coming to the market by way of easing health concerns, interest rates, the expiration of forbearance programs, and an improving economy.
When comparing today’s market with that of 2006-2008, we must also consider demand. During the years of the housing bubble, we were in a buyer’s market with appreciating home values. Today, we are in a seller’s market with appreciating home values. So, what does this mean? Demand during the housing crash was artificial, in that it was supported by an inflated ability to purchase through predatory lending and loan products that are no longer available. Consumers today, unlike 2006-2008, have a fundamental understanding of housing valuation and make educated decisions rather than decisions based upon psychological impulses. The difference today is that buyer demand is real. Lending practices have made it more difficult to qualify and the desire to own a home is strong because it’s a sound financial decision. The third reason that we are in a different position than we were during the housing crash is equity. Leading up to 2008, the number of cash-out refinances were astounding. Roughly $824 billion dollars was pulled out of homes the 3 years leading up to the crash leaving homeowners with no equity in a critical time. As home values plummeted, many defaulted on their payments and foreclosures skyrocketed.
Today, Americans are handling their equity much more conservatively. In fact, cash-out refinances over the previous 3 years are a third of what they were prior to the crash. Current statistics show that over 56% of homeowners across the country have at least 50% equity in their current homes. Knowing this, we are in a much stronger position of equity today and many will be able to weather a decline in values should we experience one.
The bottom line is that the housing industry is in a much better position than it was leading up to the crash in 2008. There are stark differences between our current market and that of a decade ago. I am confident that we have learned from our experience and that housing will continue to drive our economy forward.