There is much speculation about the health of our regional real estate market: “Are we in another housing bubble?” and, if so, “When will the bubble burst?” Our last bubble in the mid-2000s witnessed residential property values rapidly escalate from 2003–2007. There is a similar escalation in today’s market; however, there are some key differences between then and now.
According to Chief Economist Mark Fleming, whose areas of interests primarily include real estate and mortgage risk:
“During the housing bubble, rapid house price appreciation was not entirely supported by economic fundamentals, but in today’s housing market, nominal house price appreciation has been driven by a historic shortage of supply relative to demand and rate-driven surge in house-buying power. Many find it hard to believe, but housing is actually undervalued in most markets and the gap between house-buying power and sale prices indicates there’s room for further house price growth in the months to come.”
Hard to believe, we know, but let’s examine the facts.
#1 – Supply
Unlike the housing bubble years of the mid-2000s, the major factor driving up home values today is historically low inventory. Between 2005 and 2007, national inventory increased from a 5-month supply to an 11-month supply. This represented a vast over-supply of homes that did not warrant simultaneous price appreciation, making the rapid rise in pricing unsustainable.
According to a recent KCM article (Keeping Current Matters), the current national inventory supply is only 1.9 months – vastly different than 2007, and far from a “balanced” 6-month inventory supply.
Check out our first-quarter numbers that reflect our low inventory:
#2 – Demand
Today’s demand is very real, fueled by a combination of the millennial generation entering the market, continued historically low interest rates, and current COVID-era homeowners re-evaluating whether their current home situation meets their needs… Maybe it is time to purchase a smaller home with more land? Or maybe a home with better internet that would more readily support working from home? Or perhaps with employers considering continued work-from-home scenarios, maybe it is time to relocate closer to family?
Although the mortgage process is extended due to backed-up underwriters and appraisers, the lending practices are solid, and people are borrowing money that makes sense – solid loans for solid buyers.
#3 – Equity
Another difference from the 2005-2007 buying frenzy is that homeowners have equity in their homes and savings in the bank. In the mid-2000s, people were obtaining loans up to 100% of the value of their property. When the market correction started, this led to negative equity situations and the foreclosures/short sales followed, depreciating home values nationwide.
Regionally, we expect a greater influx of inventory this year over last – Sellers are encouraged by the potential earnings in this strong market. And at the present time, the buyer demand remains strong. As the COVID vaccine becomes more widely distributed, and people feel safer to return their normal lives, the pressure on our market may ease slightly, making it easier for buyers to participate in the market.