When Will The Housing Bubble Burst?

If you haven’t heard, the real estate market is sizzling hot, you have been living under a rock. Here in Massachusetts homebuyers are waiting in line to view open houses, some homes are getting over 20 or 30 offers and others are going well over 25% of the asking price.

Todays market:

I have something you desperately want, my house.

You have 15 minutes to look at it, you can come Saturday 12-12:15.

You can’t make it. Too bad.

Don’t touch.

Offers are due tomorrow.

No, I didn’t fill out a seller’s disclosure. 

Too many questions…. Next.

You kept your home inspection contingency in your offer…. Next.

Your only offering full price? Next.

But as home prices inch up quickly and buyers compete for homes, many are thinking the real estate bubble will burst.

2008 Recession

Let’s look back to 2008 when the housing bubble last burst. There were several things in play. 

First was the subprime lending market. Banks were pressured by the Federal Government to provide loans to everyone. Basically, sub-prime lending was providing homeownership to people on the fringe that probably should not have owned a house. 

Then the second ball dropped. The economy. The United States hit unemployment levels that had not been seen since the last depression. This made it much harder for people to make their mortgage payments never mind qualify for a mortgage. 

This led to the bubble bursting in 2008. 

What's Happening In 2021?

Lending is tight. Banks are not lending to anyone like they used to. Yet the housing market is red hot.

The underlying fact is there is a housing shortage.  There are more people who need or want to buy than there are houses for sale. With demand comes appreciation.

Not only does this affect home purchases but it affects rental prices. The rental market is just as crazy as the purchase market. 

Generally, house prices will rise and fall with monthly rents. Even with high rental prices and high home prices, it still makes financial sense to buy.  Monthly mortgage payments are about the same as a monthly rental. You can lock in a monthly payment on a mortgage now and rents will still rise.

When Will The Housing Bubble Burst?… or not?

There are several things to look at driving the 2021 Real Estate Market.

Housing Inventory

The population has been growing but the number of housing units being added to the overall inventory is barely keeping up with the population growth since World War ll. Cities and towns make it increasingly more difficult to build with their exclusionary zoning laws.

Yes, homes are selling like hotcakes, but it’s a shell game. With resale homes, we are just shuffling the same inventory. It is vital to bump up the production of new housing units to meet current demands. New builds need to match or outpace the demand.

Factoring the Baby Boomers into The Equation

There are 10,000 baby boomers a day turning 65. And that will continue through most of the decade. 

But many have hung on to their house longer than they would have in the past. The 2008 recession saw their retirement savings eaten up by losses in the stock market.  The Baby Boomers have felt they need to hold on longer and rebuild their retirement savings before they retire. In the past many boomer's hand onto the home, they raised a family in until they face retirement.

And, now they are stuck like all the other buyers. Yes, they can get top dollar for their home, but where do they go?

The baby boom generations are the ones with larger homes where they raised families. When they sell, it trickles down all the way down to the affordable homes for first-time buyers. It affects every segment of the real estate market.

Look at the Millennials

The Millennials are becoming the fastest-growing segment of home buyers. There has been a generational shift. Buying a home is not as important as previous generations.

But now, they have hit the age where they want to buy houses, their jobs are secure, they have paid down student debt. They want houses of their own.

Their delayed desire to own homes is now shifting, and fast.

Combine a shift in desire with some great programs for first time home buyers and the demand increases significantly.

The Internet

With Millennials entering the marketplace, the internet has become a game-changer for real estate. And, the Millennials are the first generation to grow up with the internet. Now they want to buy houses. Combined with the fact that smartphone saturation reached a peak around 2013. Basically everyone who wanted to and could own a smartphone has one…. Really not that long ago.

Heck, my mom is 80 and she can surf the web like a pro!! It is not just limited to the Millennial generation.

The internet has put every home at everyone’s fingertips the instant they are on the market and the majority of the population knows how to leverage the internet with the means to do so. I believe the internet has helped create this frenetic pace of today’s real estate market.

Covid-19

We can’t overlook Covid-19. It has added to that crazy pace. A house comes on the market Wednesday morning and sellers are limiting showings to open houses or limited hours on the weekend with offers do early the next week.

Supposedly all to prevent the spread of Covid. But it creates a frenzy for the buyers who desperately want to buy a house or need to buy a house.

The limited access to a home for sale, due to Covid, gives the seller’s an upper hand has added to the chaos of the already low inventory levels.

Mortgage Rates

What has many wondering….. when is the housing market going to crash? Is the rapid appreciation of house prices. But some of that is created by historically low interest rates. It is not sustainable.

House prices historically rise and fall with mortgage interest rates. It is about buying power and a buyer’s debt to income ratio.

Massachusetts just hit a median price of $500,000 for single family homes. At today’s interest rate of around 3% that translates into a principal and interest payment of $2108 a month. But at 4% to maintain the same monthly payment (or debt to income ratio) buyers have lost $72,000 leaving a borrower qualifying for only $428,000 home.

Since the end of 2018 and beginning of 2019 interest rates have been steadily dropping from about 4.5%. Contrast a median house price of about of $390,000 in the beginning of 2019 to a $515,000 Median House price today.

Rapid home appreciation has to do more with lowering interest rates than an actual increase of home prices.  

What Others Are Saying About A Pending Bubble Burst

Many are anticipating a bubble burst, so much so, google has reported that the search term "when is the housing market going to crash" has been up 2,470%!! 

• CNBC- When is the housing market going to crash?
• Forbes- America’s Housing Market Is Officially Over-Heating Everywhere. How Long Will It Last?
• Bankrate- Is the housing market about to crash? Here’s why experts say the answer is no

Summary

So, 2021 is about supply and demand. The demand is great, but the supply is low. And it will take years for new units to catch up to the population that needs a home, whether purchasing or renting. States, cities and towns need to address the short supply of housing before things can normalize.

This is very different from the housing bubble of 2008.

It has less to do with mortgage rates, Covid-19 and other factors. But has everything to do with everyone needs a place to live. It is a basic need.

If things remain status quo there will be no bubble bursting anytime soon. We will probably come down to a soft landing to a more balanced market in the next several years.

But remember no one has a crystal ball and unforeseen events can happen in the future.

There are some things to pay attention to in the near future that may indicate that the bubble will burst. Mortgage rates rising too quickly (to curb impending inflation), bad economic news, an ongoing crisis like Covid-19, global issues etc… combine a few of these factors and we could see a pullback happen quicker than people are expecting.

But for now, given where we are at I do not predict a bubble bursting.