Is There a Housing Bubble and Could It Pop?

It’s been about 10 years since the housing crash and things are starting to look familiar.  While there is a lot of good signs that the market is solid, there is also some data that is strikingly close to the times leading up to the crash.  Should you be worried or are things expected to just get better?


Where are the similarities?

  • Rate Increases

    The last major downturn in the housing market came right after a series of rate increases which caused a slowing in economic growth. This is interesting because, as we know, the Fed’s rate increases don’t directly affect mortgages.  They do indirectly affect them though, and there was just a .25% increase with 3 more to be expected in the coming year.  

    What does happen when mortgage rates goes up though?  Well, an increase of 1% would drive 30-year loan’s monthly payments up by 12%.  This monthly increased can have a large increase on buying power which is already affected by the annual median price gain of 7% as well as earning after taxes and inflation only increasing by 1.9%.

  • Median Home Prices

    Median home prices have historically followed the Consumer Price Index, but just before the crash they were 35% higher than the index.  This is important to mention because according to the National Association of Realtors’ reports, last summer the median home prices were roughly 36% higher.  

  • Homebuilder Company Stocks

    Over the past year the S&P 500’s index of homebuilders jumped by 75%, nearly 4 times as much as the stock market as a whole.  A jump like this may seem to show the strength of the industry, but it also shows a lack of concern. “It is 2005 all over again in terms of the valuation extreme, the psychological excess, and the denial” says an investor who predicted the market crash.  

What eases professional’s worries?

  • Millennial and Baby Boomers

    These generations are reaching ages which can be expected to fuel demand.  Millennials are entering the market as first-time homebuyers and Baby Boomers are preparing for retirement.  In fact, communities that target the 55+ aged buyers saw record sales last year and this is expected to continue.

  • New Construction

    Last November single-family new construction starts were at the highest they have been in a decade.  These properties are also not staying on the market for long due to them being in such high demand. Investors are actually being seen picking these homes up due to the lower-priced homes being in such short supply.  With all of this being said, the pace that new construction is being built isn’t as fast as it was before the bust. Estimated increases of 8-12% this year on top of the 11% in 2017 is still about 50% below the peak levels before the crash.

Given all of this, how should you feel about the market?

Confident yet vigilant is a good way to view the market currently.  It has been a sellers market for a long time and home prices are quite high, but the most important factor that affected the housing crash is not happening at the moment and that should allow us to breath easy even when there are so many similarities.  Lenders are not acting as irresponsibly.  Staying confident yet vigilant will allow you to avoid complacency and see early signs if something does start to turn.  And as always, if there are any questions associated with the market, The CAZA Group is here to help.