Are we heading into another housing crash like in 2006? Every month, there are thousands of Google searches for terms relating to “housing bubble”. It’s clearly on people’s minds. This market may feel similar to the one back in 2006 due to all the high prices, but is it?
For the market to be in a bubble, investment needs to be driving demand way beyond where it should be. So are we in a real estate bubble? I don’t believe we are.
One of the most crucial differences between today’s market and the one in 2006 is at that time the new construction market was vastly overbuilt with historically high vacancies. That, along with the relatively low cost of funds and materials, contributed to more new construction. When supply far outstripped demand, the market fell out of balance, and a correction became necessary.
Another reason for the housing crisis was that the mortgage industry engaged in business practices that ultimately damaged the value of mortgage-backed securities in the secondary market. The credit market had tightened in response, which further exacerbated the issues with supply and demand.
Thankfully, the market has changed since then. Today’s home price increases are the result of inflation and historically low supply levels, which causes many homes to sell quickly and for over their initial asking prices. Supply chain issues and the cost of materials have also slowed down the new-construction market, delaying how quickly builders can boost supply to meet today’s demand.
“If you’re on the fence about buying a home in today’s market, don’t let yourself be bullied by the ghosts of markets past or sensationalized headlines.”
Additionally, today’s stricter mortgage standards mean that the secondary mortgage products will eventually affect pricing (mortgage-backed securities, collateralized debt obligations, etc.) are much more stable than they have been in recent years.
Back in 2006, loose lending standards drove the housing crisis, but today, those standards have become much more restrictive. A report by the Urban Institute outlined the two main components of this change in the industry: product risk and borrower risk. At 1:57 in the video above, you can see a chart that highlights how both categories of risk have been reduced since the last crisis. That reduction also led to an all-time low in terms of foreclosures.
When you take into account 50% of today’s homeowners have an interest rate in the 3% range or lower, and homeowners have more equity than ever before, it shows there is no chance that a housing bubble will burst anytime soon. Today’s market does have a few issues, but it will likely normalize slowly and steadily rather than crashing all at once like in 2006.