Will there be a housing market collapse? 6 reasons why there won’t be

The US real estate market is on fire. Double-digit appreciation is the rule. Stunned sellers sift through several offers. Frantic buyers are forced to pay more than asking prices – sometimes $ 100,000 or more.

The real estate festival is in full swing. The National Association of Realtors said last week that prices for existing homes climbed a record 17% from March 2020 to March 2021 – a pace that overshadowed even the booming appreciation of the latest boom.

The last time the US real estate market looked this foamy was from 2005 to 2007. Then home values ​​plummeted, with dire consequences. When the housing bubble burst, the global economy plunged into the deepest recession since the Great Depression.

Now that the housing market is booming again, buyers and homeowners are asking a familiar question: Is the housing market about to collapse?

“The only thing I get asked over and over again is, ‘Is this a bubble? »Says Phil Shoemaker, original president of mortgage lender Home Point Financial. “If you look at what’s going on with the appreciation in house prices, it seems bubbling. But if you look at the fundamentals behind it, it’s hard to say this is the case.

Indeed, the foundations of this housing market seem much more stable than those of 15 years ago. The supply of homes for sale has fallen to an all-time low and borrowers are more creditworthy than ever.

Experts say price appreciation is ‘worrying’

Even so, the nightmarish memories of the last boom and the last crisis remain fresh in the minds of homeowners, economists, lenders and realtors. With house prices having risen sharply over the past year, the latest boom is not without concern.

“Prices are clearly accelerating at a rate that could become worrisome,” says Ken H. Johnson, housing economist at Florida Atlantic University.

Doug Duncan, chief economist at mortgage giant Fannie Mae, acknowledges concerns about the stability of the housing market. In the past, sharp increases in house prices have been a source of problems.

“In our opinion, house prices are somewhere in the range 15% above what long-term fundamentals suggest,” Duncan says. “So that’s a reason to ask, ‘Is there a problem?'”

Meanwhile, Greg McBride, CFA, chief financial analyst at Bankrate, believes a price cap is more likely than a sharp drop.

“While the recent pace of home price appreciation is not sustainable over the long term, that does not mean that prices are in danger of falling sharply. House prices can move in strong spurts – like now – and then show relatively little change over a period of several years. A price cap is the most likely outcome. “

6 reasons the housing market is not about to collapse

So are we heading for a real estate crash? That’s a fair question, so what’s the answer? Housing economists agree that no painful crashes are on the horizon.

“We don’t have a bubble,” says Logan Mohtashami, senior analyst at HousingWire. “We just have a growth in the prices of substandard housing.”

Duncan agrees that the sharp rise in home values, while unusual, is not a sign of a bubble. “It’s hard to come up with an argument that says this will partially fall,” he says.

Housing economists cite six compelling reasons why no crash is imminent.

  • Inventories are at record levels: The National Association of Realtors said there was only a 2.1-month supply of homes for sale, up slightly from the 2-month supply in February. This explains why buyers have little choice but to raise the prices. And it also indicates that the supply-demand equation simply won’t allow prices to collapse in the near future.
  • Builders cannot build quickly enough to meet demand: Homebuilders withdrew after the last crash, and they never fully reached pre-2007 levels. Now there is no way for them to buy land and get approvals. regulatory quickly enough to stifle demand. While builders are building as much as they can, a repeat of the overbuilding of 15 years ago seems unlikely. “The fundamental reason for the skyrocketing prices is increased demand and a lack of supply,” says McBride. “As builders put more homes on the market, more homeowners decide to sell and potential buyers are squeezed out of the market, supply and demand can rebalance. It will not happen overnight.
  • Mortgage rates remain close to their historic lows: After hitting historic lows in January, mortgage rates rose slightly, but not by much. Freddie Mac’s survey of lenders says the average rate fell below 3% last week. Low prices give home buyers increased purchasing power. The Mortgage Bankers Association expects rates to hit 3.7% by the end of 2021. That would hurt refinancing, but not buying a home. “We don’t think this will increase enough to impact buyers,” says Mike Fratantoni, the group’s chief economist.
  • Demographic trends are creating new buyers: There is a strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places. Millennials are a huge bunch and in their prime buying years. And Hispanics are a young and growing demographic, keen on homeownership.
  • Lending standards remain strict: In 2007, “lying loans”, when borrowers did not need to document their income, were common. Lenders have offered mortgages to almost everyone, regardless of credit history or amount of down payment. Today, lenders set strict standards on borrowers – and those who get mortgages have an overwhelming majority of credit. The typical credit score of mortgage borrowers in the third and fourth quarters stood at an all-time high of 786, according to the Federal Reserve Bank of New York. “If the lending standards relax and we go back to the Wild West days of 2004-2006, then that’s a whole different animal,” says McBride. “If we start to see prices rise due to the artificial purchasing power of loose lending standards, that’s when we worry about a crash.”
  • Foreclosure activity is disabled: In the years following the housing collapse, millions of foreclosures flooded the housing market, pushing down prices. This is not the case now. Most homeowners have a comfortable cushion of equity in their home. Lenders did not file notices of default during the pandemic, pushing foreclosures to record levels in 2020.

It all adds up to this consensus: yes, home prices are pushing the boundaries of affordability. But no, this boom shouldn’t end in a collapse.

“I’m not worried about a real estate bubble,” says Ralph McLaughlin, chief economist at financial technology firm Haus.com. “The fundamentals are all there – low supply combined with growing demand for property – to suggest that the overheating we are seeing in the housing market is not based on the minds of animals, but on an unfortunate and fortuitous series of market forces over the past year.

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About Teresa G. Wilson

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