Hot market not sign of housing bubble
by Peter Crowley, President of
RE/MAX Alliance Group
It is time to address the elephant in the room – are we in the midst of a housing bubble? Given the curveballs that we have been dealt in the past twelve months, I am squarely out of the prediction business. Who would have thought that after a global pandemic that led to a national shutdown of our economy and an ensuing economic recession that the housing market would react so favorably?
While home prices have climbed at an accelerated pace over the recent months, this is driven almost entirely by the economic principle of supply and demand. Simply stated, we do not have a sufficient supply of homes to satisfy the current housing demand. Therefore, the competition for the available homes in the market is driving prices higher.
We all live with the stark reminder of the Great Recession of 2008, and the devastating impact it had throughout our economy, but most significantly on the housing market. It is important to understand some distinct differences between what fueled the housing crash then and the current state of our housing market.
First and foremost, the demand for housing in our current market is fueled by a large amount of cash buyers (close to 50% in our local market). Furthermore, those remaining buyers that do finance their homes are subject to significant vetting for credit worthiness and ability to repay their loans. Contrast that to the environment leading up to the 2008 crash where demand was artificially inflated by lenders offering 100% financing with little to no verification of a borrower’s qualification and ability to repay those loans.
Another significant difference is the amount of equity that homeowners have today versus 2008. While it is true that many homeowners have re-financed their homes in the past few years to take advantage of historically low interest rates, most are motivated to lower their monthly mortgage payments rather than tapping into the equity in their home. In the years leading up to 2008, because of the easy ability to tap into cash-out refinancing, homeowners were treating their homes as ATM machines and sometimes borrowing more than their home was worth. While we may see an increase in mortgage delinquencies when the foreclosure moratorium lifts, the increased equity will make it more likely that homeowners will try to sell their home rather than allowing a foreclosure to occur.
Finally, the dynamics in the new construction market are vastly different than 2008. Prior to the crash, builders, both large and small, were highly leveraged and building on speculation that the demand would catch up to their growing inventory of homes. Today, however, the builders that survived that tumultuous time learned valuable lessons and are less leveraged and resistant to building large amounts of inventory beyond what their current demand requires. In fact, most builders would acknowledge that, due to labor and supply constraints, they cannot keep up with the demand for new construction brought about by the limited supply of resale homes.
It is common knowledge that the real estate market (like all economic markets) is cyclical and subject to slow downs and corrections. Prior to the crash of 2008, our housing market was not immune to those fluctuations in the market, but they always seemed to be less severe when compared to the national housing market. The scars from the Great Recession have left many fearing that we are at or near another precipice. While I mentioned at the beginning, I am out of the prediction business, I do know that the foundation of our local housing market is fundamentally different (for the better) than what led to the drastic reduction in prices during the crash.
We would like to thank our guest author Peter Crowley
Larry and Ann Brzostek
As always, for all your Real Estate needs in the Sarasota Area, call or text Larry @ 941-993-3125
or
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