The Looming Housing Bubble: Are We Headed for a 2008 Déjà Vu?
I often find myself growing weary of hearing other Realtors, loan officers, or individuals in the real estate field asserting that we can't possibly be in a real estate bubble because the current situation is nothing like the crisis of 2008. In 2008, the housing bubble burst due to a toxic mix of lax lending standards, overvalued housing markets, complex financial products, flawed credit ratings, and a subsequent wave of mortgage defaults. This led to a financial crisis that had a profound and lasting impact on the global economy, ultimately resulting in widespread economic turmoil and the loss of millions of homes and jobs.
What Drove Home Prices Way Up
Low interest rates. Interest rates have been at historic lows for several years, which has made it very affordable for people to borrow money to buy a home. This has led to an increase in demand for housing, and prices have risen accordingly. According to the S&P CoreLogic Case-Shiller Home Price Index, the national home price index has increased by 44.8% since the beginning of 2020. This is the largest 2-year increase on record. The low interest rates continue to cause low available housing inventory, as people with low interest rates, don’t want to sell and give up their historically low mortgage rate for one that is now over 8%.
FOMO. The fear of missing out (FOMO) has also played a role in the housing market. Many people are worried that prices will continue to rise, so they are buying homes now before it's too late. This has also contributed to the increase in demand. Media coverage of the housing market often reports on the rising prices of homes, which can create a sense of anxiety among potential buyers. This anxiety can lead people to buy homes impulsively, without doing their due diligence.
Investor demand. Investors have also been buying homes, both for rental income and for speculation. This has also increased demand and driven up prices. Companies like BlackRock and iBuyers have been major players in the investor market. BlackRock is a global investment management firm that has been buying homes at a rapid pace. In 2021, BlackRock purchased over 100,000 homes in the United States. iBuyers are companies that buy homes directly from homeowners, often without inspections or repairs. These companies have made it easier for investors to buy homes, which has contributed to the rise in prices.
Low inventory levels. Low housing inventory levels drive home prices up by creating a seller's market. When there are fewer homes on the market than there are buyers, it creates competition among buyers, which drives up prices. This is because buyers are willing to pay more for a home if they know that there are not many other options available.
Since this is a New Jersey centric blog, here are some issues that lead to the increase in housing prices in the Garden State:
The COVID-19 pandemic led to an increase in remote work, which has allowed people to live in more affordable areas. This has increased demand for housing in places like New Jersey, which is a relatively affordable state when comparing it to super expensive New York City.
The influx of wealthy New Yorkers and other urbanites seeking more space and a better quality of life.
The state's strong economy, which has created jobs and attracted new residents.
The high demand for rental properties, which has pushed up prices for both homes and apartments.
Some factors that could cause the housing bubble to burst.
Rising interest rates. If interest rates start to rise, it will become more expensive to borrow money, which could lead to a decrease in demand for housing. This could cause prices to fall, which could trigger a panic among investors and homeowners, leading to a further decline in prices. Mortgage interest rates have gone up significantly since hitting their lows in January 2021. The average 30-year fixed-rate mortgage was 2.65% in January 2021, but it is currently 7.42% as of September 10, 2023. This represents an increase of 4.77 percentage points.
Economic downturn. A recession or other economic downturn could also lead to a decline in housing prices. This is because people may be less likely to buy homes when they are worried about their jobs or the economy. The number of job openings has declined, and wage growth has slowed. This could be a sign that the economy is starting to slow down. Job openings declined to 1.1 million in July 2023, down from 11.3 million in June. This is the first decline in job openings since January 2023. The most recent consumer confidence statistics were released on September 28, 2023 by the Conference Board. The Consumer Confidence Index (CCI) fell to 69.5 in September, down from 71.2 in August. This is the lowest level since February 2023. The CCI is a measure of how consumers feel about the economy and their personal finances. It is based on a survey of 5,000 households.
The decline in the CCI was driven by a number of factors, including:
Rising inflation: Inflation is at a 40-year high, and consumers are worried about the impact it will have on their wallets.
The war in Ukraine: The war in Ukraine is causing uncertainty and anxiety among consumers.
The Federal Reserve's interest rate hikes: The Federal Reserve is raising interest rates in an effort to combat inflation, but this could slow economic growth
Rising Inflation. Inflation can fuel a real estate housing bubble burst by eroding purchasing power, making it harder for buyers to afford homes. Rising inflation often prompts central banks to raise interest rates, increasing the cost of borrowing and mortgage payments. This can lead to reduced demand, speculative behavior, and higher construction costs, all contributing to the potential burst of a housing bubble.
Lagging annual income vs increasing home prices. When home prices rise faster than incomes, it becomes more difficult for people to afford homes. This can lead to a decrease in demand, which could cause prices to fall. Wages have not been keeping up with inflation. This means that people's purchasing power has been declining, making it more difficult for them to afford homes. According to the Bureau of Labor Statistics, the average hourly wage in the United States was $31.24 in February 2023. This is up 5.7% from February 2022. However, inflation was 7.9% in February 2023. This means that wages have actually lost purchasing power over the past year. The gap between wages and home values has been widening in recent years. In February 2023, the median home price in the United States was $428,700. This means that a typical homebuyer would need to earn over $130,000 per year to afford a home with a 20% down payment and a 30-year mortgage.
The high levels of debt: Many homeowners are carrying a lot of debt, which makes them more vulnerable to a housing downturn. The average mortgage debt for homeowners in the United States is $314,000, according to the Federal Reserve. This is the highest level of mortgage debt since 2008. According to the New York Federal Reserve, the rate of new credit card delinquencies hit 7.2% in the second quarter of 2023, passing pre-COVID levels. Meanwhile, the rate of new auto loan delinquencies is also on the rise, hitting 7.3% in the same period. According to a recent report by the Federal Reserve Bank of New York, the national repossession rate for auto loans was 0.63% in the second quarter of 2023. This is up from 0.58% in the first quarter of 2023 and 0.49% in the second quarter of 2022. Consumer credit card debt in the United States is high. In the second quarter of 2023, it reached $1.03 trillion. This is up from $986 billion in the first quarter of 2023 and $863 billion in the second quarter of 2022. The average credit card debt per person is $6,954. This is up from $6,472 in the first quarter of 2023 and $5,526 in the second quarter of 2022.
Government regulation. The government could also take steps to cool the housing market, such as raising down payment requirements or imposing stricter lending standards. This could also lead to a decline in prices. For example, in a recent interview, Treasury Secretary Janet Yellen said that the government is "looking at a range of options" to address the housing market, including raising interest rates and imposing stricter lending standards.The Federal Reserve has also been vocal about its concerns about the housing market. In a recent press release, the Fed said that it is "monitoring the housing market closely" and that it is "prepared to take action as needed to address risks to financial stability."
It is important to note that there is no consensus among experts on whether or not we are in a housing bubble. Some believe that the market is simply adjusting to a new normal after years of low interest rates. Doug Duncan, chief economist at Fannie Mae: Duncan has said that the housing market is "moving from a period of extraordinary strength to a more sustainable pace." He believes that the rise in home prices is due to the low interest rates, but he does not believe that there is a bubble.
Others believe that we are at risk of a bubble bursting, but it is impossible to say for sure what will happen. Robert Shiller is an economist at Yale University and the winner of the 2013 Nobel Prize in Economics. He is known for his work on behavioral economics and for his development of the Case-Shiller Home Price Index, a measure of home prices that is used to track housing bubbles.
Shiller has been warning about a housing bubble in the United States for several years. He believes that the rapid rise in home prices is unsustainable and that a crash is possible. He cites a number of factors that he believes are contributing to the bubble, including:
The low interest rates: Interest rates have been at historic lows for several years, which has made it easier for people to borrow money to buy homes. This has also contributed to the rise in home prices.
The high levels of debt: Many homeowners are carrying a lot of debt, which makes them more vulnerable to a housing downturn.
The lack of affordability: Home prices are rising faster than incomes, which is making it more difficult for people to afford homes. This could lead to a slowdown in the housing market.
The speculative bubble: Shiller believes that there is a speculative bubble in the housing market, meaning that people are buying homes not because they need them, but because they believe that prices will continue to rise.
If you are considering buying a home, it is important to do your research and understand the risks involved. You should also make sure that you can afford the payments, even if interest rates rise or the housing market declines. Unforeseen circumstances can occur, but if you are looking to sell in 3-5 years, it might not be good timing to buy a house now. If you are planning on living in your home for the long term, you’ll have less risk and be able to sell in the next upturn/peak of the market.
What do you think?
