Real Estate: It’s Not a Bubble Unless it Pops

A bubble, by definition, pops and prices plummet.

“Look at buyer demand. Look at homeowner equity. Prices could stop going up for a bit – but it’s not a bubble.”

Record home prices, bidding wars and other factors show a real estate market that appears eerily similar to the 2006 bubble market, although mortgage loans are much harder to get today than they were 15 years ago. A mortgage credit availability index reached almost 870 in June 2006; it was only 125 this March. Today, loans are proportionally smaller to house values and borrowers’ income; borrowers’ average credit scores are higher.

Another implosion seems unlikely, with tight housing supply and strong demand likely to persist. There’s no imminent danger of a sharp appreciation in mortgage rates – though they’re likely to rise a small amount – and the U.S. Federal Reserve has purchased nearly $1 trillion in mortgage-backed securities to keep the rates down since resuming its buys in March 2020.

Although rising home prices may not be as destabilizing as they were in the last bubble, they are placing homeowners in a more favorable position than renters. CoreLogic estimated that homeowners’ equity in mortgaged homes gained 16%, or $1.5 trillion, in 2020 alone.

Is the house price rally decelerating? Indicators are inconsistent. The Mortgage Bankers Association’s index of applications for mortgages to buy a home slipped to 269.6 the week of June 4 from 342.8 in the week of April 16. And the National Association of Realtors®’ index of pending home sales declined 4.4% in April – down 19% from its August 2020 record. Source: Bloomberg (06/10/21) Coy, Peter © Copyright 2021 INFORMATION INC., Bethesda, MD (301) 215-4688

I don’t focus on either the rate of price increases or the level of mortgage applications. The rate of increase may be slowing but that means prices are still going up and the house you want to buy will still cost more if you wait. And the level of mortgage applications can be influenced by a slew of factors – from extreme weather to a shortage of properties available.

After such a strong increase in home prices it is natural to wonder when the rate of increase will slow. But that is a different matter from wondering if prices are in a bubble and about to pop.

We see the same phenomenon in the stock market. Prices are at an all-time high – so are they about to plummet or pop?

Investment experts always tell their clients not to try to time the stock market. That should be even more true about buying a home – because it is first and foremost just that – a home. And yes, over time, it is also likely to be a good investment.

What is clear today is that some homes are being priced at what is called an aspirational level. A good Realtor, however, will be able to guide you away from these. I am about to close on a house for a client in Southwest Florida for 17% less than the original, aspirational, list price.

Andrew Oliver
REALTOR®| Market Analyst |

Naples, Bonita Springs and Fort Myers
m. 617.834.8205
Market Analyst | Team Harborside |
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945

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