Are We in a Housing Bubble?

  • Sapir Team
  • 06/14/22
Let’s begin at the beginning: the last time the US housing market was in a bubble was 2006 – 15 years ago - just before the big 2008 crash and recession. Conditions at that time were much different; two main reasons drove the 2006 housing boom: unqualified buyers getting loans, and buyers speculating on their expected equity.
 
Lending banks back in the early 2000s were giving subprime mortgages to nearly anybody! Take a look at the chart below, showing the amount of risk lenders were taking back then: product and borrower risk were through the roof! Lenders weren’t vetting their clients properly, giving money to people who normally would not qualify for a loan or a refinance. As all this credit rushed in, it helped drive the housing boom and created artificial demand. However, when the housing market started correcting itself, those bad loans brought on a wave of defaults and foreclosures, causing a real financial crisis that brought some of the nation’s biggest banks to their knees, and resulted in falling home prices.
 
Data from the Urban Institute shows the amount of risk banks were willing to take on then as compared to now.
 
Speculating is when people take large risks against their investments, like believing the housing bubble will never burst and taking a bunch of new loans to finance a new car, say, or a vacation, against the estimated value of their property. This was the mindset in the early 2000s, and when home prices began to fall, these people found themselves practically underwater, with loans they couldn’t afford to pay off. Some had to abandon their homes, leading to even more foreclosures.

Today, we are in a completely different situation, especially in New York City.

 

"In inflation adjusted terms, homeowners in Q4 2021 had an average of $307,000 in equity- a historic high." - Odetta Kushi
First, banks are much more cautious when they vet their clients for a mortgage, and make sure the client can afford it, so there’s little concern about loan default. 

The demand is also real these days and not inflated by non-existent loan standards. Buyers are driven to buy due to genuine re-evaluation of what owning a home means, especially after the pandemic and with work from home situations. 

Homeowners today also have more equity than they did back in 2006. 

Homeowners didn’t forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).

The latest Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 in home equity over the past year alone. 

Odeta Kushi, Deputy Chief Economist at First American, reports: “Homeowners in Q4 2021 had an average of $307,000 in equity – a historic high.”

ATTOM Data Services also reveals that 41.9% of all mortgaged homes have at least 50% equity. These homeowners will not face an underwater situation even if prices dip slightly. Today, homeowners are much more cautious.

A POSITIVE SCORE INDICATES THE HOUSING MARKET IS OVERVALUED. A NEGATIVE SCORE INDICATES THE HOUSING MARKET IS UNDERVALUED.
MAP: LANCE LAMBERT SOURCE: THE REAL ESTATE INITIATIVE AT FLORIDA ATLANTIC UNIVERSITY
Here is another interesting tidbit: some regional housing markets could be in full-blown housing bubbles. At the very least, many markets are priced exorbitantly compared to their historical average. But look at New York City: it’s behaving differently than most of the country, and for good reason: Markets that saw an influx of buyers due to the pandemic’s “work from anywhere” trend are now seriously overpriced; they are poised to crash as a result of rising mortgage rates and the slowdown the housing market is facing due to it. But New York saw an exodus of employees during the pandemic; it is now overpriced by less than 3%, indicating that our housing market is more stable and is fair relative to household income. 

Any price correction coming to the city due to rising rates will not be as steep as in other locales in the nation. Not only that, but if a 2023 recession does come and employers finally have the economic power to force staffers back into the office, our housing market is at a lower risk of home price correction since we will see those employees coming back to our business centers. 

Zillow has gone even further saying that all this talk of a bubble about to burst will actually make it a reality.

If builders trim their construction plans due to fear of a crash, the tight inventory crunch that has helped drive home prices up will last even longer. 

According to Zillow, “If prices did begin to fall, we know there are millions of hindered first-time buyers, or younger millennials soon to be aging into that situation, waiting in the wings to snap up homes if they see a bargain. Those first-time buyers will continue to feel the pressure from rising rents, which jumped 17% in just the past 12 months. And a generally high-inflation environment will keep homeownership looking attractive as a hedge against inflation.”