Is 2021 like 2007?
There is a lot of chatter in the housing market about a bubble. Are we headed for a similar situation to 2007 when the bubble burst?
There’s a lot happening in the world of real estate & home building today; home and commodity prices rising quickly, a super competitive real estate market and strong housing demand. Many of our prospects, trusted realtor partners and buyers are speculating what the future holds for the housing market and whether we are headed for a new housing bubble, just like 2007. Ultimately, is right now a good time to buy a home? Or is it smarter to wait it out?
Why 2021 is not a housing bubble like 2007
The headlines are filled with news that points to a potential housing crash. That piqued our interest and we decided to take a deep dive into the fundamentals of the housing market to see what is really happening and if we are headed towards another bubble like 2007.
“The residential real-estate market is on its biggest tear since 2006, just before the housing bubble burst and set off a global recession. Yet in nearly every meaningful way, today’s market is the inverse of the previous boom. In the mid-2000’s, loose mortgage-lending standards enabled borrowers with poor credit histories to purchase homes beyond their means, sometimes with mortgages that required low payments in the early years of the loan…”
— Wall Street Journal
The Wall Street Journal sums it up beautifully; the fundamental forces driving the market today are drastically different from what we saw in 2007.
Percentage of Distressed Property Sales
Distressed sales – foreclosures and short sales – represented less than 1% of sales in February 2021.
SOURCE: Urban Institute
Regarding Cash-Out Refinances:2020 Was Nothing Like 2006
Today a much lower percentage of borrowers are taking cash out when refinancing their homes compared to the market in 2006.
SOURCE: Black Knight, Freddie Mac, KCM Research
Default Risk in the Mortgage Market (1999-2020)
Today’s lending standards are more stringent leading to lower risk of default.
SOURCE: Urban Institute
Historic Data for the Mortgage Credit Availability Index (a report from the Mortgage Bankers Association)
The amount of available mortgage credit has reduced drastically and stabilized since the housing crash
SOURCE: MBA
The graphics shown here illustrate that today’s market is driven by true buyer demand and a lack of supply in both the existing home market and in the new home market. More and more buyers entering the market will continue to compete for fewer homes driving pricing upwards for the foreseeable future. The lack of supply in the market is not easily rectified.
“With demand for homes outpacing new listings, buyer competition continues to intensify. On average, there were four offers per home sold (closed) in February, according to NAR’s latest February REALTORS® Confidence Index Report, a monthly survey of REALTORS® about their transactions. One year ago, there were two to three buyers for every home sold. The intense competition has led to double-digit price growth and properties selling in record time. To get back to a healthy supply level equivalent to 6 months of monthly demand, an additional 2.7 million homes should be on the market for sale.”
— NAR
As much as builders would like to flip a switch to meet the demand for housing and balance the market, this presents challenges of its own. With the commodity supply problems created by the Covid pandemic, the massive efforts required to entitle and develop additional land projects, and today’s rising construction costs, there is little sign that a balanced market will emerge in the near future.
Annual Home Price Appreciation
Home Price appreciation is high, but remains lower than the last housing run up. At some point, buyers struggling to qualify will be effected as rising home prices outpace incomes.
SOURCE: Core Logic, Black Knight
Single-Family New Homes Completed
Builders have not kept pace with the 50-year average of new homes constructed adding to the 2.7M homes needed to meet current demand
SOURCE: Census
Months’ Inventory of Existing Single-Family Homes for Sale
The previous housing downturn was characterized by rapidly rising inventory and prices vs. today which does have rising prices, but declining inventory
SOURCE: NAR
So what can we expect for the next 12 months?
We expect housing prices to continue to rise and demand to remain strong. We also expect some modest interest rate increases in the next year. Rising prices combined with rising interest rates will soften demand, especially at entry level prices as some buyers will no longer qualify for a home purchase. This cycle will eventually lead to slower price home appreciation and some demand moderation in the housing market. We do not see a price crash of any kind or a substantial change to the housing market for the next several years.
We plan to revisit this topic from time to time in an effort to keep our clients and prospective clients informed and to assist them in planning their timing to make their dream home purchase.
Our team is always here to assist you in the everchanging world of housing—reach out today!