Home values have been appreciating for the past 10 years. The pace of appreciation accelerated in 2020 (the national average was nearly 10%) which has led to increasing speculation that we are in the midst of another housing bubble. While there is no doubt the real estate market will shift at some point, there are 3 compelling reasons why we are not currently in a housing bubble. Watch the following video, or continue reading below, to learn more.

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1) Housing Inventory is Extremely Low

Supply and demand is the driving force behind the price of any good or service. If supply is high and demand is low, prices generally decrease. If the opposite is true, demand is high and supply is low, then prices increase.

Supply in real estate is measured in “months supply of inventory”, which measures the amount of time it would take all homes currently listed for sale to sell at the current pace of sales. A balanced market is generally considered to be 6 months worth of supply. Anything above that is considered a buyers’ market, indicating prices will likely fall, and anything below that is considered a sellers’ market, where prices normally rise.

Nationally, between 2006 and 2008 the months’ supply increased from just over 5 months to 11 months. Even though supply was over 7 months in 27 of those 36 months, home values continued to increase.

Although we didn’t see home inventory rise that much locally, we went from 2.5 months to 4 months in Frisco and 2.7 months to 6.4 months in Prosper, prices continued to increase as inventory increased when we would have expected them to flatten.

Today, there an average of 1.9 months’ supply nationally and there is 0.6 months’ supply in both Frisco and Prosper.

With demand being high and supply being low it is only natural for prices to continue to appreciate, although I do expect the pace of appreciation to moderate this year.

2) Housing Demand is Real

Robert Schiller, a fellow at the Yale School of Management’s International Center for Finance called the demand experienced during the housing boom in the mid-2000s a result of “irrational exuberance.” The definition of which is “unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.” The market at that time was crazy and made no sense. There was a frenzy-type atmosphere and belief that home prices would continue appreciating at an accelerated pace forever.

The mortgage industry added fuel to this fire through an insatiable need to originate as many new loans as possible. Mortgage money was made available to virtually everyone. Fog a mirror, get a mortgage. The Mortgage Bankers Association publishes an index called the Mortgage Credit Availability Index. The higher the index, the easier it is to obtain a mortgage. Prior to the early-2000s housing boom, the index stood just below 400. In 2006, the index hit an all-time high of 868. Today, that index stands at 122.5, meaning it is much harder to obtain a mortgage today than in any of the years leading up to the bust.

Rather than demand fueled by a frenzy, current real estate demand is real. People getting married, and having children, are two of the biggest drivers of homeownership and that is where we find ourselves today with Millenials, the largest generation in the country. The pandemic also caused many to reevaluate their housing needs in light of more work, school, and entertainment taking place at home. These changing needs, coupled with historically low mortgage rates, have helped drive the demand we are seeing in today’s market.

3) Household Equity is Substantially Higher

With widely available mortgage money it wasn’t just homebuyers that were caught up in the frenzy. Existing homeowners started using their homes like ATM machines and did cash-out refi’s to purchase everything from clothes to cars, to vacations, boats, and jet-skis, you name it. Between 2005 and 2007, homeowners pulled $824 billion dollars of equity out of their homes. Some lenders were allowing refi’s to go as high as 125% of the market value of the home. As prices began to drop it didn’t take long for many to find themselves underwater in a negative equity position. An avalanche of foreclosures and short sales followed.

Cash-out refi’s over the past 3 years are less than a third of what they were leading up to the crash and the max loan to value of a cash-out refi is limited to 80% of appraised value.

As a result, home equity today has reached record highs. According to the Census Bureau, over 38% of owner-occupied homes in the country today are owned free and clear. ATTOM Data Solutions just released the fourth quarter 2020 Home Equity report which revealed;

17.8 million residential properties in the United States are considered equity-rich, meaning the combined estimated amount of loans secured by those properties was 50% or less of their estimated market value….The count of equity-rich properties in the fourth quarter of 2020 represented 30.2%, or about one in three, of the 59 million mortgaged homes in the United States.

When you combine the 38% of homes that are owned free and clear with 18.7% of all homes that have at least 50% equity, you realize that 56.7% of all homes in the country have a minimum of 50% equity. That’s a significantly different situation that we found ourselves in 2007, 2008, and 2009.

Bottom Line

In the current housing market, supply is at an all-time low and demand is real and motivated. Even if there were to be a drop in home prices, which I’m not predicting, homeowners have the equity to weather the dip. If you questions about the current real estate market or would like to discuss your real estate goals for the year, please Schedule a Call as I’d be happy to talk with you.