Real Estate Trends Lending
Housing Bubble or Housing Boom? What happens next!?
Jun 29 2022 3 min read (553 words)
The current housing market can sometimes feel too good to be true. At least for those selling homes. For anyone looking to buy one, it's another story completely. It makes you wonder: is this sustainable; will the system eventually collapse? You wouldn’t be alone in anticipating the first housing bubble burst since the 2008 recession. Yet economic experts believe that there are multiple signs that point this market being a boom instead of a bubble.
What led to the Great Recession: From 2004 to 2007 cheap credit and careless lending practices led to a boom that turned into a housing bubble. Housing speculation increased, with mortgages held by investors rising from around 20% in 2000 to around 35% in 2007. In early 2006 home prices fell while the Federal funds rate rose to 5.25%. Most Americans found themselves paying for higher mortgages than their homes were worth. When the bubble burst, financial institutions were left holding trillions of dollars of near-worthless investments in subprime mortgages. Millions of people lost their homes.
Mortgage rates in 2021: In January 2020, before the Covid-19 pandemic began, the average monthly rate on a 30-year fixed-rate mortgage was 3.62%. By August of 2020 it fell below 3%, an incredible new low. In January 2021, it had fallen to 2.74% and has not risen significantly in the past six months. Economists believe that this bargain-level of mortgage rates has been the strongest driving force in this hot housing market boom. With better rates, mortgages are more affordable and less likely to be defaulted on.
Lower lending risks: In 2010 President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law established the Consumer Financial Protection Bureau. According to Investopedia, the CFPB’s job was to prevent “predatory mortgage lending and make it easier for consumers to understand the terms of a mortgage before agreeing to them. It deters mortgage brokers from earning higher commissions for closing loans with higher fees and/or higher interest rates and requires that mortgage originators not steer potential borrowers to the loan that will result in the highest payment for the originator.” These regulations have made it safer for buyers to take out mortgages, and for the banks to avoid the risk of buyers defaulting. In 2021/22, we are not as likely to repeat the events of subprime mortgage crises of 2007/08.
Supply and demand are reversed: As so many people were buying houses with bad mortgages leading up to the 2008 financial crisis, construction followed suit and produced more homes than were needed. Things are different today. CNBC claims that “the U.S. has underbuilt its housing needs by at least 5.5 million units over the past 20 years.” In today’s market, demand is vastly outpacing supply. Construction is unable to produce new homes fast enough with the constraints in materials and labor. An exodus to the suburbs has swallowed up most of the homes across the country. Houses are selling within days, and most of the time above the asking price. Even with most people beginning to give up and feel like they’ve been priced out of the market, demand is unlikely to plummet any time soon.
Could there be a crash? The experts don’t expect one anytime soon. The largest reason for a housing crash would be dependent on a large-scale economic crisis, like in 2008. The U.S. economy has been on the rocks since the pandemic began in March 2020, but the federal government has been quick to act. Multiple stimulus checks, bailouts, and housing regulations have kept the economy from crashing. And despite the economic downturn, the housing market continues thriving. If anything, we may see a slow deflation of the market and a cooldown to normal levels. But economists are not predicting a bubble in today’s market.