7 Reasons We're Not In A Real Estate Bubble

The most frequently asked question I get right now with housing prices soaring is "are we in a real estate bubble and will it burst?" A recent article I read from Real Trends, resonates with my perspective on the current market and why we are not in a real estate bubble.

An Urban Land Institute survey of 43 economists at real estate organizations found little likelihood of a market meltdown. In fact, the economists projected home prices will grow an average of 4.1 percent over the next three years, above the long-term average of 3.9 percent. In a recent forecast, Fannie Mae projected new and existing home sales will be 6.2 percent higher than last year, although the pace of transactions will slow later this year. Most brokerages predict a rebalancing at some point but cannot predict exactly when and do not predict a bubble that will pop.

Here are seven reasons the U.S. is not in a housing bubble.

LOW INVENTORY. This is clearly the case, higher demand than supply right now. A recent statistic I read for Fort Collins CO brings it home. In a "balanced" market, we would see a 6 month supply of homes for sale, today we are averaging a 2 week supply. On a national level, housing sales across the country declined this spring, according to data released by the National Association of Realtors. The primary reason is lack of supply. In March, there were 1.07 million homes for sale, down 28.2 percent from the prior year. That is far below the 4 million homes on the market in July 2007 during the last housing bubble.

The ongoing issues of low inventory, caused in part by the high cost of new builds, will not go away anytime soon. With a very low supply of inventory for single-family homes in March – well below normal levels – home prices are likely to continue to rise. As Lawrence Yun, chief economist of the National Association of Realtors®, says, “This is not a bubble. It is simply lack of supply.”

LACK OF SUPPLY. Currently, the U.S. housing market is 3.8 million single-family homes short of demand, according to a recent analysis from Freddie Mac. A low level of new home construction over the past three years has increased that shortfall, which was estimated at 2.5 million units in 2018.

New housing starts are rising this spring, but the supply of new homes is projected to remain well below demand. In March, housing starts reached a seasonally adjusted annual rate of 1.739 million units, the highest level since June 2006. Doug Duncan, chief economist for Fannie Mae, says production may decline later this year as homebuilders face supply constraints, such as increasing prices of lumber and other materials.

FAVORABLE DEMOGRAPHICS. Nearly 5 million millennials will be turning 30 this year, with similar numbers coming in 2022. We are seeing a significant percentage looking to buy homes and condominiums – a big change in the market compared with five years ago.

In fact, according to many economists, millennials are expected to continue to drive the nation’s real estate market for the next decade, spurring demand for starter and move-up homes. Again, strong demand for homes is one of the main reasons a market bubble appears unlikely.

RETURN OF INTERNATIONAL DEMAND. As the COVID-19 pandemic begins to recede, it is predicted that international travel and home purchases will pick up later in 2021. A spur of buyers from Canada, Europe, Asia, and the Middle East has begun in certain states seeking a vacation home, many being cash buyers.

LOW MORTGAGE RATES. Each month we anxiously await to see if the interest rates will go up. And although we are seeing rates creep up slightly, they still remain very low. This spring, the Federal Reserve is supporting the housing market by keeping short-term rates low for borrowers – a practice it intends to follow until 2022 at least. The Fed is also purchasing agency mortgage-backed securities (MBS) to stabilize the lending market. Again, there is no sign of a bubble caused by home financing policies.

TIGHT CREDIT. Risky credit practices in the early 2000s were a leading cause of the last housing bubble. Back then, lenders offered loans with “nothing down,” adjustable rates or balloon payments, and easy terms to borrowers with marginal credit ratings. At that time, risky loans comprised about 40 percent of the mortgage market, according to a Morgan Stanley report. Currently, those loans are only 2 percent of the market.

GREATER EQUITY. Rising home prices and greater savings rates have increased equity for millions of U.S. owners. The first-quarter report from ATTOM Data Solutions, found that one in three of the 55.8 million mortgaged homes was “equity-rich,” with loans 50 percent or less of estimated market value.

On the other side of the equation, just 2.6 million mortgaged homes were considered seriously underwater, combined loans at least 25 percent more than the value. In addition, distressed sales — including bank-owned (REO) sales, third-party foreclosure auction sales and short sales — accounted for just 5.8 percent of sales, the smallest percentage since 2003 and dramatically below the 42.2 percent in the first quarter of 2009.

Looking ahead, there will continue to be a short supply of homes for sale. However, as sellers see more opportunities for a move, there are strong indicators that buyers will continue to be in abundance.

*Information derived from Real Trends, a real estate industry newsletter.

For a free, no-obligation market analysis of your home, please contact me at 970.219.5922. I am also happy to provide a free consultation on how to prepare your home for sale, even if you do not plan to sell for another few years!