Are We in a Housing Bubble?

Escalating home prices have both buyers and sellers asking: “Are we in a housing bubble?” The good news is that several factors indicate that we are not!

Low Inventory

In 2020, home values appreciated 10% on average across the country. While 2021 growth is not expected to match last year’s (experts are predicting closer to 5%), buyers and sellers are still worried that home prices are too high, and that depreciation is likely to follow.

However, unlike the Housing Bubble years of the mid-2000s, the major factor driving up home values is that we are also in a dire inventory shortage. Currently, there is an extremely tight supply of homes on the market, the lowest on record since the turn of the century. A balanced real estate market’s inventory sits around 6 months. Today’s current market is at 1.9 months, a historically low number of homes for sale. In fact, inventory has slowly been declining for years now.

In comparison, the inventory level from 2005 and 2007 increased from 5 months to 11 months, a vast over-supply of homes that did not warrant the price appreciation that went along with it. The biggest driver of price appreciation is a simple case of supply and demand – which is what we’re seeing in the market today.

Real Housing Demand

The buying and selling frenzy that in-part caused the market collapse in the mid-2000s was fueled by people worrying about missing out on the market. The mortgage industry fed into the frenzy, making it easy for people to obtain home loans much higher than they could afford.

Today’s real estate demand, however, is a very real thing. Millennials are finally ready for homeownership and are hitting the market en masse. The health crisis has also challenged homeowners to re-evaluate whether their current home meets their needs, driving even more buyers into the market. Low mortgage rates make now a great time to purchase a home.

Positive Equity

Following the housing and economic crash of 2008, economists, financiers, and real estate industry experts have tried to figure out why the entire system crumbled the way it did. Most will agree that one of the biggest pieces of that catastrophic equation came down to a lack of equity.

The mid-2000s saw a massive wave of homeowners cashing out the equity in their homes—they were using their homes like ATMs to afford some of the finer things in life. This phenomenon led to a lot of negative equity situations, where the amount someone owed on their home was far more than what their property was worth. Many foreclosures and short sales followed, depreciating home values nationwide.

Today, there is a much different equity picture. Cash-out refinance volume over the last three years is less than a third of what it was compared to the three years before the crash. More than 38% of homeowners have paid off their mortgage free and clear, and another 18.7% have paid off over 50% of their mortgage.

This positive equity perspective puts the current housing market in a much stronger place, minimizing risk of foreclosure and stabilizing home values across the U.S.

In summary, the combination of low inventory, real demand, and positive equity all point to a stable market, not a bubble.

 

Debbie Austin is a realtor associate with Keller Williams, Roseville and has been helping clients buy and sell property in the area for 17 years. If you have a specific real estate question you wish to see addressed, contact Debbie at debbieaustin@kw.com or debbieaustingroup.com.