During 2020, home values increased about 10 percent and are forecast to rise another 5 percent in 2021. This rapid rise in home value has some folks concerned that we may be in the midst of a housing bubble, similar to what we experienced about a decade ago.
But this market is different. Here’s why:
1. THIS TIME ... THE HOUSING SUPPLY IS EXTREMELY LIMITED
Supply and demand is key to the price of any item on the market and houses are no exception. High supply and low demand typically result in falling prices. Conversely, low supply and high demand generally yield higher prices.
Real estate has its own measure of supply and demand. The metric is called "the monthly supply of inventory." The measurement is based on the number of homes on the market compared to the number of people buying new homes. In general, an average monthly supply of inventory for the housing market is about 6 months. A higher number than that is defined as a buyer's market, indicating that prices will attenuate as houses remain on the market longer. Anything below that is defined as a seller’s market where prices normally rise as buyers compete for fewer homes.
Between 2006 and 2012, which is often viewed as the Housing Market Bubble and Collapse, the monthly inventory supply increased from just over 5 months to 11 months. In comparison, the monthly inventory has been below 5 months for the last 3 years, below 4 for thirteen of the last fourteen months, less than 3 for the last six months. Currently inventory stands at 1.9 months.
If supply is low and demand is high, prices naturally rise .
2. THIS TIME ... THE DEMAND FOR HOUSING IS REAL
According to Robert Schiller, a fellow at the Yale School of Management, during the housing boom in the mid-2000s, there was what an "irrational exuberance " regarding the housing market. He describes this phenomenon as "an unfounded market optimism that lacks a real fundamental valuation basis, but is based on psychological factors." People were caught up in the housing/mortgage frenzy and bought homes based on expectations that the housing market would continue its astronomical rise regardless of existing market conditions.
The mortgage industry fueled this exuberance by making mortgage money easily available. The Mortgage Credit Availability Index is published by the National Association of Mortgage Bankers and ranks mortgage availability. The higher the index, the easier it will be to get a mortgage; the lower the index, the more difficult it is to get a mortgage.
Before the “big boom”, the index hovered below 400. In 2006, the index hit an all-time high of more than 868… nearly anyone could be approved for a mortgage. In contrast, today the index stands at 122.5, well below even pre-boom levels.
Another consideration? In today's real estate market, the demand is real, not manufactured. For example, Millennials have reached the age to marry and have children and are among the main drivers for home ownership. In addition, the pandemic has caused every household to redefine the meaning of "a home," to reevaluate their housing needs and to make different decisions in home ownership.
This desire to own a home, when coupled with historically low mortgage rates, makes buying a home today a solid financial decision. The current demand for housing is real—not manufactured.
3. THIS TIME ... HOUSES HAVE A LOT OF EQUITY
During the housing boom, even existing homeowners got into the action with many treating their homes as ATMs. Many Americans withdrew large sums of equity from their homes and as prices began a decline, some homeowners found themselves without equity, resulting in defaults and foreclosures.
Today, the volume of cash-out refinances has dropped by two-thirds and this conservative approach has led to unprecedented levels of equity. Current numbers indicate that more than 50% of homes in the United States have a minimum of 50% equity.
The Takeaway?
The supply of housing remains at record lows. The demand is leveling somewhat in our area, but it is real and correctly motivated. Homeowners enjoy enough equity to deal with a hypothetical drop in home values.
Our current housing market is not at all like 2008. Housing remains a wise investment when approached for the right reasons. Questions about your personal situation? Don’t hesitate to give me a call.
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