Headlines about the rapid pace of home price appreciation and stories of bidding wars on every property have many worried that a housing bubble could be brewing. Are we heading for the 2006 housing crash all over again? No!
Today’s market looks quite different than 2006 thanks to stricter lending rules and the underlying fundamentals that are driving pricing.
1. Supply and Demand
There has been a shift in Supply and Demand dynamics that contributed to home price increases. Millennials and younger generations are reaching the point of wanting to buy versus rent, and this was only accelerated by aspects of the pandemic such as spending more time at home and having the ability to save more money by being home. Increased desire for homeownership from these groups coupled with older buyers looking to trade up has resulted in a surge in demand.
Additionally, homebuilders are much more prudent about the volume of homes they are bringing to market today as a result of the last housing cycle. Most of the nation is experiencing a supply shortage, especially at lower price levels.
These 2 dynamics created a mismatch in supply and demand that accelerated home price appreciation. 2006 was characterized by overbuilding and Sellers rushing to list their homes - we are not seeing that today.
2. Interest Rates are Low
Interest rates are the lowest they have ever been. During the height of COVID, we saw mortgage rates continue to set record lows. These ultra-low rates have helped fuel price increases as Buyers can afford more house when rates are lower as a result of lower monthly mortgage payments.
There are concerns over rising interest rates. Yes, we expect rates to rise, but they are still going to be low compared to decades of the past. The Fed would have to raise rates very drastically to really halt all the demand.
Even when we think of rising rates, it is important to remember there is a duality at play. To a certain level, increasing home prices as a result of low interest rates and a less expensive purchase price at a higher interest rate make a Buyer indifferent.
Prudent Buyers understand that the longer they wait, the more price appreciation they will miss out on as well as face the risk of financing at a higher rate.
3. Demand will Persist
There continues to be incredibly large amount of demand because of a supply shortage. In fact, data from a report released by the National Associations of Realtors suggests that there is a shortage of nearly 5.5-6 million homes which equates to roughly $2 trillion waiting to be spent when using a national median selling price of $375,000.
4. Speculative Lending is not Present
The market is not driven by speculative lending as it was in 2006. In fact, it is quite the opposite. Lenders now need to follow strict guidelines that were put in place as a result of the Great Recession, and today’s borrowers are creditworthy. Additionally, more risky products such as adjustable rate mortgages represent just 5% of total purchase and refinance loans compared to nearly 35% at the peak of 2006.