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 sparkling 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 all the time 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 to be bubbling over. 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 view, 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?'”

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 an all time high: The National Association of Realtors says 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: Home builders pulled out after the last crash and never hit pre-2007 levels. Now there’s no way for them to buy land and get regulatory approvals fast enough. to stifle demand. While builders are building as much as they can, a repeat of the overbuilding of 15 years ago seems unlikely.
  • 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 houses 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 down payment amount. Today, lenders impose 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.
  • 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 homeownership – to suggest that the overheating we are seeing in the housing market is not based on the minds of animals, but on a series. unfortunate and fortuitous market forces over the past year.

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