The US housing market is a hot topic at the moment. I’ve seen videos showing up lines People are waiting to enter an open house offer. My relatives just went through the home buying process and lost their homes despite tens of thousands of homes being offered for the asking price.
It begs the obvious question: Is this a housing bubble, and if/when is it likely to burst? It’s a difficult question to answer because no one knows for sure. However, you can take a look at the housing market data and history to get a feel for how things are going in the coming months and years.
Regulations are stricter this time
I will admit that the housing market looks like a bubble at the moment, and it probably is. Home prices are constantly rising, and it is fair to wonder how long most families will be in the market for a home. But there are a few reasons why “bubble burst” may not be as violent as you think.
Image source: Getty Images.
The housing crash that began in 2007 is widely considered to be the most violent in US history and is a reference point for many people watching home prices rise today. The collapse of 2007 is still debated to this day, and while I won’t try to break down all the moving pieces, there are some important differences between then and what’s happening now.
First, there were systemic problems in the lending industry that “set the pump” for what happened in 2007. Lending regulations were much looser at the time, and banks approved mortgages for people who couldn’t afford to repay. These mortgages were called “subprime mortgages,” and the percentage of subprime mortgages jumped from the single-digit average in the early 2000s to 18% to 20% between 2004 and 2006.
Eventually, many of these borrowers couldn’t pay their bills, and the sudden rise in foreclosures set off a chain reaction that destroyed housing.
The government tightened regulations in the wake of the financial crisis, and it is now very difficult to get a mortgage without having the right income and credit score. This is not to say that speculation cannot resurface, but the Dodd-Frank Act was created to prevent a recurrence of bad lending practices. Takeaway? I don’t know that the housing market will “collapse” without a shock to the banking system, as it did in 2007 when people quickly started defaulting on their mortgages.
supply vs demand
Historically, real estate has proven resilient, with average home prices declining in just eight of the past 60 years. Consider the 2007 housing crisis; Below you can see that from the price peak that led to the crash to a roughly 30% drop in prices at the bottom of the market.
Average US Existing Home Sales Price Data by YCharts
In other words, it took years for home prices to fall, and it was arguably the deadliest crash in history!
Could a recession cause prices to fall? Sure, just about every year, average home prices have been dropping during a recession. Mortgage rates are also on the rise, which makes home financing more expensive and can help cool demand from buyers. At 4.7%, rates are still near multi-decade lows, but have risen rapidly so far this year.
Ultimately, you need housing demand to fall, for prices to fall. Recession or rising rates can have this effect, but no one can know for sure when or to what extent.
One unintended consequence of the 2007 housing crash was that demand fell too quickly, essentially shutting down home builders. The housing recovery took years after the crisis, and today it is estimated that America has nearly 5 million single-family homes.
US housing start-up data by YCharts
House prices will likely peak when supply and demand meet in harmony, which does not appear to be the case yet. It’s hard to make the case until I stop running into throngs of people trying to pressure an open house offer. When sellers can’t turn away buyers who offer thousands at the asking price.
There may be a recession coming, and mortgage rates may continue to rise, like buckets of water trying to quell the raging fire of US home prices. It will sink anytime soon.
