Should we be Worried about the Current Real Estate Market?
So many people have asked me lately, “Are we in a housing bubble?” I certainly don’t claim to know the future, and after 2020 I think no one can assume to know what might happen next. But, based on economic fundamentals consistent throughout the country, it does not appear we’re anywhere close to a bubble like in 2008.
Economic fundamentals? What do you mean? I mean the laws of economics. Specifically supply and demand. When supply is high and demand is low, there are low prices. And when supply is low but demand is high, there are high prices.
You’ve probably heard housing inventory is at 1 month for February 2021. Meaning, if no houses came on the market, we’d run out in 1 month. In a balanced market, we’d see around 6 months worth of supply. Why’s inventory so low? We’ve had 13 straight years of being below the 50 year average of building new homes, causing a huge housing shortage because we haven’t met the need that we’ve historically seen not to mention population growth across the country as a whole. We’re building more homes, but it’ll take a long time to make up for 13 years of not building enough homes to meet the demand.
Because of the historically low rates, many people refinanced their homes and are deciding to update their existing home instead of selling their home. This is a tread I see continuing as many home owners will like their low monthly mortgage payments. Further decreasing the supply in the market. Lots of people are worried about foreclosures flooding the market after the pandemic. 2.7 million home owners are currently in a forbearance program. However, seeing the aftermath of the great recession, it’s highly likely the government will intervene with loan restructuring for those who need assistance. Allowing people to keep their home and move their missed payments to the end of their loan. Additionally, many homeowners have a significant amount of equity in their home. Allowing them to sell their home before going into foreclosure or needing to do a short sale.
Ok, so supply is low, and looks like it’ll be low for the foreseeable future, but what about demand? Millennials have aged into their prime home buying years and make up the largest segment of people looking to buy. Older generations are staying in their homes and deciding not to see. If they do, they typically downsize instead of going to a retirement home or assisted living. Since the pandemic, I see this trend continuing as people opt to live in their own home instead of a large retirement home. Further increasing demand, and decreasing supply.
Another factor to demand are the Low interest rates. Buyers can afford to spend more without changing their monthly mortgage payment thanks to the low rates. We see rates ticking upward. But most economist say the rising rates are temporary and predict rates will level off in the low 3’s.
So what does this mean for the future of real estate?
I don’t have a crystal ball, but back in 2005 unqualified buyers received risky loans artificially increasing demand. Home builders went crazy building homes and over saturated the market, creating large supply. In today’s Real Estate market we have a huge housing shortage and many qualified buyers searching for a home, driving up prices. Is the appreciation a bubble and pop? Maybe, but the appreciation growth is backed by economic principals.
What are you to do in todays market if looking to buy a home? Personally, would the high prices scare me away from making a purchase? No. 20% of all dollars in the world were created in 2020. Many economists are expecting inflation. Driving prices even higher. And, because interest rates won’t always be this low and you can buy more without spending a lot more monthly. And, a mortgage payment won’t go up every year where rent prices may.
As I would with any market, I’d talk with my agent and lender to see what I can comfortably afford to pay each month and from there determine what is the best option for me.
If you’re debating buying or selling your home in the next year or two, please reach out. It doesn’t cost you anything to become a more informed buyer or seller.