Many people are asking, “Are we in a housing bubble?”
The simple answer is, “No.” There are no indications that we are in a housing bubble even though we are in the first phases of a recession. A real estate bubble like the 2008 collapse established deep fears in home owners and those fears are again coming to the surface in the current economic climate.
Sub-prime mortgages that were blamed for the 2008 crash are much more regulated and a significantly smaller part of the market in 2022. Because lenders and regulators don’t wish to make the same mistakes that were made previously, credit scores have been much higher than in 2008.
During the Great Recession, the average credit score for a home buyer was 707, while it is reported to be 776 in Q1 2022. In addition, as we see adjustable-rate mortgages becoming more attractive to home buyers, lenders are requiring that buyers qualify on the fully adjusted higher rate rather than the lower rate like before.
Supply and demand also play a huge part in the market. Freddie Mac currently estimates that the United States is over 3 million homes behind in meeting buyer demand. As builders pull back from massive increases in new construction starts from the pandemic, it is likely to be years before inventory returns to needed levels. As a result, a sellers’ market will continue for the foreseeable future, although the intensity will subside from the bidding wars during the height of Covid-19 times.
Buyer demand is still high as there is low inventory across the US. Because rental prices have also skyrocketed, more consumers are stepping into the home buying market. First time home buyers will continue to be a major part of the home buying economy, but it may take help from mom and dad or new 40-year loan programs to enable first timers to get into an entry level home.
Locking in a fixed rate mortgage does hedge a home owner against inflation. As inflation continues to rise in the US, home buyers with fixed mortgage rates are paying the same payment they did from the first payment. This type of opportunity does not exist when renting and tenants are also dealing with the added inflation of monthly rental rates.
Across the country, some markets may experience stagnation of appreciation. Seeing appreciation rates in the 2%-3% range may be alarming. However, comparing that to 18%-20% annual appreciation, it is going to feel like things are going backward when they are not.
Over the past 30 years, average home price appreciation has been over 4.5% annually. That is ¼ of where the market has been for the last 18 months and a slowdown is expected.
The bottom line is, even with a massive slowdown in appreciation, investing in a home is still better than any other investment in a wealth building portfolio.