Housing Headed for Bubble?

Those of you who remember the housing crisis that precipitated the Great Recession may have been looking somewhat askance at the situation facing the residential housing market. It has been booming throughout what has been an extremely difficult year and that begs the question: Is this another bubble ready to burst?

Will there suddenly be a collapse in demand, or a crisis related to mortgages that have been issued? That is certainly a possibility, but there are major differences between the situation from 2006-08 and the situation now.

The three factors are mitigating against a repeat of that previous debacle, and they are rooted from the lessons learned during the last meltdown. Mortgage standards have been much tighter. That has reduced the number of people who have been thrust into foreclosure. This recession differs from the last one because it hit the poorer service sector workers. Most of these people have been renters. We face an eviction crisis as opposed to a foreclosure crisis.

The second factor is that down payments have been higher; that locked more people into their homes, making it harder to walk away. Third, consistently high prices have been supported by everything from demand to shortages of available housing. There has not been an issue with overpriced homes suddenly losing value and shoving people underwater on their mortgages, not to the extent of the last recession.

The housing market has been a consistent strong point for the economy over the last year for a variety of reasons. The growth has been impressive despite factors that usually mitigate against this kind of growth. The price of homes has been going up month by month, according to the Case-Shiller index and other assessments.

This has not just been in hot markets, but throughout the country. The unemployment rate has been high as the recession emerged, and usually this puts a damper on demand. The millennial is still somewhat reluctant to abandon the apartment or loft lifestyle, and still the market surged because the mortgage rates on offer have been very low.

For the high-end home buyer, the motivator has been the success of the stock market. The dip in the new home starts number is likely related to some changes in that mortgage rate situation. Some increases already exist, and more are expected as long-term bond yields continue to climb. Any hint of increased Fed rates will send the mortgage rates even higher, and the housing boom will start to slow quickly.

Chris Kuehl, Ph.D., NACM economist 

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Friday, 03 December 2021

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