Fear not, buyer and sellers—here are five reasons we’re not in a housing bubble:
1. Mortgage lending standards are stricter than they were prior to the last housing crash. It was much easier to get a mortgage back then. Today it’s simply much tougher to qualify. If you look at the graph at 0:43 in the video, you’ll understand why. The easiest way to understand that graph is this: The higher the number, the easier it is to get a mortgage.
2. Prices are not soaring out of control. Though price appreciation has been quite strong recently, it’s nowhere near the kind of rise we saw before the crash. The average annual appreciation is around 3.6%, and although our average is higher than this historic norm, it’s not accelerating beyond control as it did in the early 2000s.
3. There’s not a surplus of homes on the market. On the contrary, we have a home shortage. A balanced market has around six months of supply. Anything more is an overabundance, which causes prices to depreciate. Anything less is a shortage, which will lead to continued appreciation. As you can see at 1:39, there were simply too many homes on the market in 2007 compared to right now. Further fueling this shortage is the drastic decrease in new construction homes. Over the previous decade, we saw significantly fewer homes built compared to the previous decades that led up to the housing crash.
4. Homes became too expensive to buy in 2007—they’re more affordable now. The affordability formula factors into a home’s price, the wages earned by the purchaser, and the mortgage rate. If you flash back to 14 years ago, prices were high, wages were low, and mortgage rates were more than 6% on average. While prices are still high today, wages have increased and mortgage rates are closer to 3%. Compared to 2006, a lower percentage of median income is needed to purchase a median-priced home.
5. People are equity rich now instead of tapped out. Prior to the bubble, homeowners were treating their homes like an ATM. Many were withdrawing their equity as soon as it built up and using it for things that weren’t necessarily housing-related. They learned their lesson in the process. Today’s homeowners aren’t tapping into their equity in that fashion. Over 50% of the homes in the country have over 50% equity.
As you can see, we’re not in a housing bubble. It’s a simple matter of supply and demand. We don’t have enough homes on the market to meet the demand. That’s why prices continue to increase, and it’s why people’s equity positions continue to increase as well. Unless we find a way to solve the housing shortage issue, we won’t see a bubble burst anytime soon.
If you have questions about this topic or there’s anything else I can assist you with, don’t hesitate to reach out to me. I’d love to hear from you.