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Are We Facing a Real Estate Bubble?

Recollections of the 2008 economic recession and the mortgage crisis that followed are fresh in the minds of many of the older Millennial and Gen-X homeowners burned by the housing market in the past. As buyers compete in multiple offer situations and pay well-above asking price for that new home—whether as first-time homebuyers or as move-up buyers—many are wondering whether the housing market is due for a correction.

While firm predictions are hard to come by, the evidence suggests that there’s every reason for optimism as the 2021 market heats up. With economists predicting slower, more sustainable growth over the next year, fears of a bubble appear to be overblown. In addition, differences in the nature of this housing market upturn suggest that it is built on a more solid footing than the investor and financial speculation that led to the previous inflated valuations.

Conditions that lead to a real estate bubble

Generally speaking, a housing bubble occurs when there is an imbalance in the market that artificially inflates prices beyond their reasonable levels and expectations. The bubble pops once conditions force a return to more appropriate price levels, leaving those who bought at the top of the market with little equity and, in some cases, negative equity or underwater mortgages.

The housing bubble that occurred in 2008 was the result of poorly underwritten subprime mortgages followed by speculation on the financial markets focusing on mortgage-backed securities. This double-whammy led to a spate of foreclosures caused by too little equity and the economic impact of the attendant recession.

It is important to note that the 2008 recession was unusual in its focus on the housing market. Historically, in most recessionary periods home prices have held up as real estate is seen as a more secure investment when the economy at large is contracting. In addition, homeowners tend to hold onto their homes during a recession and avoid making big moves, increasing stability in the housing market.

Conditions creating the current increase in market values

Unlike many housing bubbles, the current rise in home valuations is fairly easy to understand and explain. The following factors have shifted the balance of supply and demand, resulting in the increases we’re currently experiencing in markets across the country. Because they are based on solid factors, these increases promise to be more reliable indicators of value than the speculative price increases normally associated with real estate bubbles.

Historically Low Interest Rates

One of the first actions taken to combat the economic effects of COVID-related shutdowns was to lower the interest rates for mortgages and mortgage refinancing. However, unlike the 2008 meltdown, this time lenders were better monetized and borrowing requirements were more stringent. This kept underqualified borrowers from taking out loans ensuring that those with better than average credit and reserves were the ones buying.

Low Inventory Sales Environment

While most metropolitan areas were already experiencing low inventory prior to March 2020, the current adjustment has been notable for the ongoing tight market conditions. This has been due to a variety of factors, including early slowdowns in the rate of new construction, the reluctance of homeowners to make major changes in the midst of a pandemic, and seller uncertainty regarding their ability to find a new home after the sale of their current one.

Extended Spring Market

Pandemic-driven shutdowns occurred in mid-March 2020, right in the middle of what promised to be an active spring market. Once real estate professionals and mortgage lenders got up to speed with virtual tour and transaction models, buyers once again began looking for their dream homes while homeowners sought larger spaces for work-from-home (WFH) and school-from-home realities. This has led to a sort of unending spring market, which now shows no signs of slowing as the 2021 traditional spring sales season approaches.

Expanded Market Activity

In most hot real estate markets, higher home sale prices and increasing activity is limited to the most desirable in-town enclaves and popular exurban markets. However, the availability of long-term WFH means that many markets that are normally overlooked—especially those in outer suburban and rural areas—are suddenly in demand. Offering more space and larger lots, these newly popular markets are seeing their share of increasing home value and marketability.

Economic Indicators for 2021

The advent of improved treatment options, the rollout of vaccines, and the effect of pent-up demand from homeowners tiring of their current homes, as well as the incentive of multiple offer potential and still-low interest rates, all hold promise for increasing supply and ongoing demand. Coupled with record-low interest rates, even these higher home values are made more affordable, offsetting increased risk.

Even those markets most affected by the pandemic, including in-town and condo inventory, appear to be poised for a comeback, easing concerns that those segments would experience a drop in value. In addition, experts foresee an increase in housing starts, leading to more available inventory and increasing affordability.

As always, it’s important to talk to a Matlock Group real estate professional in order to better understand how conditions in your specific market and in your specific property reflect broader trends in the market at large. Our agents can give you insights on the most recent comparable property sales in your area and help you think through the decisions you need to make in order to optimize the value of your property and the equity in your home.

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