What’s going on with the Housing Market and When will it End?

While the housing market has been hitting new records over the last year, many economists and real estate experts are wondering when things will start to cool off again. There are understandably many fears that the market will crash, as it did in 2008 which ultimately was followed by the Great Recession.

If you similarly are fearing this market crash, then stick with us in this piece as we break down some of the forecasts of the coming year and analyze the many factors that have gone into this historic time for real estate.

This market seems familiar…

Let’s start off with some history. We all remember the historic housing crash in 2008 that in part, led to the Great Recession. This resulted in plummeting property values, mass foreclosures, and the loss of trillions of dollars in retirement savings and equity for millions of Americans. Similar to now, back then, there was mass panic-buying, with some houses only on the market for a handful of hours before receiving multiple offers.

However, what is different, is the circumstances of what led to this extreme housing market. While irresponsible lending practices are some of what got us into the economic mess that was the Great Recession, this year’s market is based on a different issue: supply and demand.

We are seeing historically low interest rates from lenders, which in turn allows folks who have largely been decreasing their spending and increasing their time at home this past year, be incentivized to find a house that fits their new, largely at-home lives. According to Forbes, “the key difference now versus during the housing bubble before the Great Recession is that back then it was easy credit that fueled speculation, not cheap credit.”

Additionally, there is the issue of the Pandemic which increased the cost of building a home exponentially. This rise in cost, shifted many into the existing homes market, which increased the prices of the houses on the market, pricing out many low and middle income folks from the market all together. With this increase in competition and shifting of housing tiers, the supply is scarce and houses are receiving multiple offers, well over asking, with little to no contingencies. Overall, whoever can pay the most and close the fastest gets the deal done.

So with this current reality, it seems like we must be in a ‘housing bubble,’ right?

What exactly is a ‘bubble’ and are we in it?

According to Taylor Marr, Lead Economist for real estate website Redfin, “A real estate bubble occurs when home prices escalate beyond what can be explained by the fundamentals, like mortgage rates, population growth, or household income growth.”

What seems to happen in a ‘bubble’ is largely socially produced: it’s a feedback cycle where investors generate large enthusiasm for the market based on increasing prices and then add to that increase in pricing by bidding higher and higher until prices are out of control.

So does this definition of a housing bubble explain what is going on today? Many experts are saying we are not quite in a bubble yet. According to national data, Mortgage rates fell 88 basis points during this year, going from 3.62% to 2.74% from Jan 2020-Jan 2021. All the while, home prices have increased more than 11% over the last year. These two data points seem to cancel each other out, with lowering mortgage rates offsetting the rise of home prices. Additionally, the savings many had from the pandemic due to decreased travel and entertainment spending, along with stimulus checks, seems to also have a short-term boost on housing prices.

Along with these financial factors, we are also seeing some impacts to this market from the changing demographics of the country.

Millennials and Technology

For most folks, this past year has been dominated by the effects of the pandemic: job loss, restriction in travel, and more time spent at home. This has increased the number of people interested in buying a new home, often looking for larger spaces to accommodate home offices and gyms.

Not only has the pandemic added to this historic housing market, but the fact that tens of millions of Millennials are coming to ‘first home-buying age’ with a decades long nationwide generational housing supply shortage. With an increase in Millennials looking to buy houses, but a housing market that just can’t keep pace with the population growth, we are seeing another factor that is impacting this wild market.

To top that off, changes in technology are having a large effect on things. Online listing platforms like Zillow and Realtor.com have made finding houses quickly more accessible to home buyers. Additionally, virtual closing and digital mortgage approvals are other tools that have greatly increased the speed at which homes are marketed and sold. While these changes definitely add to the uniqueness of this market, they don’t necessarily mean we are in for a crash.

So what should we expect?

Top economists and housing experts don’t necessarily think that this housing market will lead to the same economic collapse that came in 2008. The key takeaway here, is that the demand that is increasing housing prices is real, not artificially produced like it was 15 years ago. This time, families, newly remote workers, and even companies that are relocating to lower tax and regulation states are fueling the increased pricing.

So the more immediate concern with this housing market is this increased pricing which has largely priced out lower and middle income earners as well as first-time home buyers. Real estate experts like Marr, say that prices will eventually have to taper out: “Even when the fundamentals are sustainable like they are now. Strong increases in mortgage rates, which are likely coming soon, will inevitably cool home appreciation and bring prices back in line with wage.”

So there’s some good news on the horizon for all of you home buyers out there! We just have to hang in there and ride out the wave. With little fear of another market crash, now’s the time to be getting all of your ‘ducks in a row’ so that once a property comes on the market, you are ready to move fast!

Reach out to us today to see how CPL can meet your real estate investment lending needs and get ahead of this inevitable ‘cooling down’ of the market.