Are we in a housing bubble?

Home prices are soaring at all time highs. Housing inventory is shockingly low. Corporate spending is skyrocketing. Builders are bringing as much product to market as possible. It seems like everyone is either buying a home or talking about buying a home. This all feels eerily familiar, doesn’t it?

It’s really no wonder so many people are asking themselves, “Are we in a housing bubble?” and “When will the housing market crash?”

I’m here to bring you some good news. We are NOT in a housing bubble and we are not anticipating a housing crash anytime soon. We may be hearing the same song, but it is a completely different dance this time.

WHAT IS A HOUSING BUBBLE?

A housing bubble is when the housing market is “full of air” due to growth being artificially stimulated and sustained. In other words, a housing bubble is created when there are price increases that are not supported by the fundamentals. In a bubble, home values are based on something that is not real or extremely fragile.

The last housing crash was certainly the result of a housing bubble driven by the credit boom. Demand for housing was being driven by financial institutions who were giving individuals loans for homes that they never should have been able to get. Individuals could obtain home loans without any proof of employment and no cash. Banks were even willing to give a loan for more than 100% of the home’s actual value.

This artificially inflated home prices and there was no real equity securing any of these loans. Once borrowers started to default on their loans in mass quantities, the bubble popped, property values tumbled, and we all know the rest of the story.

What followed was a massive wave of distressed inventory, rock bottom housing prices, millions of individuals with their credit in shambles and financial institutions begging for government bailouts.

ARE WE IN A HOUSING BUBBLE?

Based on the definition above, we are not in a housing bubble this time. People seem to throw around the term “bubble” anytime housing values are going up, but the market is not full of air this time. In fact, it’s just the opposite. This is a period of record housing market expansion.

We currently have a housing market with record levels of equity, individuals can afford their payments and are well qualified for their mortgages, and a massive demographic shift has resulted in a severe supply/demand imbalance. This is all driving real increases to property values.

WHY THE REAL ESTATE MARKET’S GROWTH IS REAL

Meaning we are not in a housing bubble

Take yourself back to your high school economics class where you learned that the imbalance of supply and demand is what determines pricing. When demand is greater than supply, prices rise and the intensity of this imbalance indicates how sharply prices will go up. The largest factor driving home values up today is unquenched demand.

The significant supply and demand imbalance tell us that home values will continue to rise and solid lending practices, low interest rates, and record equity levels tell us that this growth is likely to be sustained.

There are 3 reasons we know we are not in a housing bubble: High Demand, Low Supply, and Solid Financing. Let’s take a closer look at the specific factors that are driving demand, stifling supply, and the financial factors that are ultimately sustaining the growth.

What is driving demand?

#1 – New household formation is occurring at record highs

The biggest buzz word used to explain the unprecedented level of demand in real estate right now is “Demographics”. Today, the largest segment of the largest generation, millennials, is approaching the average age of the first-time home buyer, 31 years old. Millennials will be entering their peak homebuying age from 2022 to 2024. It is estimated that 72 million millennial home buyers will be entering the market. This equates to an unprecedented level of demand for housing that we just don’t have.

-Leah Collich (Real Wealth)