Those who ignore history are doomed to repeat it, or so said Spanish philosopher George Santayana. Sometimes we cannot forget history even if we try. Currently, many feel the cold touch of history in the housing market.
Right now, the average price of American homes, in real terms, is now the highest it has ever been. Yes, this means prices are even higher now than at the peak of the housing bubble in 2006 before the whole thing bottomed out in 2012.
A lot of the housing frenzy can be blamed or focused on the pandemic. However, even before the pandemic hit, the market was in high gear. Climbing more than 50% between 2012 and 2019. When the pandemic hit, the housing market saw a buying demand and a selling freeze; this situation, the mismatch of supply and demand, caused a price boom.
A colossal price boom. With the current home prices being higher than before the crash, people are naturally worried, is history repeating itself? Is there yet another housing bubble? And, if so, what are things going to look like at the other end?
Also, if what we went through before wasn’t a bubble, why was there a crash?
In simplest terms, a housing bubble comes from speculation. Speculation is when investors buy something with the expectation that they will make money on it because the prices will rise in the future. But, here’s the rub, speculation can be akin to a self-fulfilling prophecy; speculation creates its own demand.
As speculators buy more houses, hoping to make money off increasing house prices, they push up the cost of houses by increasing the demand. Now, as the price of houses goes up, more speculators see the potential to make money, so they get in the game. The more speculators, the higher the costs, and on and on it goes until …
The bubble pops.
As more speculators get on board and the prices rise, eventually, there has to be a tipping point where all the price increases are no longer sustainable. Why? For many reasons, the economy begins to slow, and many people find it impossible to pay their massive mortgages. Another case could see interest rates rising, making debt harder to repay. Whatever the case, when it happens, the cycle starts to occur in reverse. Investors now begin to pull out of the housing market, and demand decreases as well as prices. Once prices fall, potential buyers become scarce, and current investors try to sell what they have, fearing the prices will continue to drop and they will lose money. This cycle now pushes housing prices down at a rapid rate, and what follows? The bubble bursts.
When a housing bubble bursts, the repercussions are not just felt in the housing market; the entire economy can also suffer. A massive financial crisis can follow as loans turn bad and people cannot afford to repay. The banks, of course, want their money and their only recourse is to kick hundreds, maybe even thousands of people out of their homes.
When people lose their homes, they lose their lives. Normally stable families that got caught in the housing bubble are suddenly homeless. Once they are homeless, there is the cycle of finding work, which is virtually impossible without a home address. Then there are the financial repercussions of defaulting on a loan. The process spirals downward, and the economic ramifications are devastating.
Oddly enough, the pandemic has been very good for the housing market. At the start of the crisis, people were advised to stay home and avoid the chance of getting sick. The housing market came to a searching halt. Economists speculated that the housing market was in for a massive downturn.
They were wrong.
When real estate transactions were once again permitted, the landscape had changed. The rise in remote work, kids being taught via zoom, caused families to flock to the housing market. The idea being, if more of life was going to be taking place at home, the more home we need for our life to take place in. The desire for the suburbian life was now on the rise.
Two factors helped this along. City dwellers found that life was too cramped with parents working from home and kids being schooled from home, so they migrated to the suburbs. And, suburban dwellers started looking to purchase second homes to relieve themselves of the boredom of being quarantined. The stay-at-home orders made some folks want to have an option as to which home they stayed in.
During this time of the pandemic, home prices have climbed. In June of 2021, the median price for an existing home reached above $363,000. That is a 23.4% year-over-year increase.
Some people have felt a side effect bubble during this housing market madness, the lumber bubble.
At their peak on May 7, lumber prices hit an all-time high of $1,670.50 per thousand board feet. That was six times higher than the pre-pandemic low in April of 2020. Earlier this year, lumber prices were sky-rocketing due to mill shutdowns and demand for newly built homes and home improvement projects, both spurred on by the pandemic. The lumber bubble caused a rise in the cost of single-family homes by as much as $36,000.
These historically high lumber prices have aided in the housing market insanity. Due to the pandemic, the housing market saw a record low in available homes for sale so, new homes were the answer. In April, 1 in 4 homes sold was a newly built home. Historically the average has held steady at 1 in 10. All the demand for new homes put a strain on the lumber industry, causing speculators to try to cash in on the rising costs of lumber.
As discussed earlier, speculation leads to increased interest in an industry, but over-speculation brings about a tipping point, and the price is no longer sustainable. This is what happened to the lumber industry, and now, the bubble has popped.
There has been a lot of speculation around the current housing market. Some are seeing shades of the housing market of 14 years ago, which led to the great recession.
However, some economic experts, like CNBC’s Jim Cramer, don’t believe the current housing market excitement portends another problem like the one we had back in 2006. The main reason that Cramer and other economists don’t see a connection between this year’s housing boom, and the one we experienced before is that mortgage standards now are much stronger than they were in the early 2000s.
It seems that we learned something from the last housing debacle. The housing boom that led to the great recessions saw a rise in sub-prime lending. Banks and other types of mortgage lenders were originating riskier loans, requiring little in the way of documentation proving the borrowers could afford to pay their monthly mortgage payments.
On top of that, many of these loans included adjustable rates that ballooned after the introductory period. By comparison, today’s mortgage lenders have become much more
conservative and disciplined in their lending.
With mortgage lenders being so careful, the demand seen in today’s housing market is much more organic than before the housing bubble burst and the recession set in. In real estate, it is common wisdom that people don’t buy houses due to low-interest rates or investment potential.
The main impetus for buying a home is because of life change. Millennials, the largest generation, are getting married and having kids, and with those life changes comes the desire to own a home.
Another positive factor in the current housing market is the strength of stocks for companies like Lowes and Home Depot. Even if people aren’t moving into new homes, they are doing upgrades and remodels on their current homes. This indicates that the economy slowly but surely is improving.
This is a strong indication that we are experiencing a housing boom, not a housing bubble.
Right now, if you’re thinking of buying a home, you’re looking at low mortgage rates and, as we’ve said, a pretty stable market. Few red flags are indicating that we’re going to be repeating the debacle of 2006. So, in a word, yes, now is a good time to buy a house. If you want more information, talk to an experienced home builder like Revere Homes.
However, ask an expert in the real estate business, and they will tell you that there is no way to calculate the “perfect time” to buy a house. When mortgage rates go up, house prices ease off. However, if you wait for a price decline or a market correction, then you could be facing high-interest rates. If you need to buy a house or just want to buy a house, then it’s time to buy one. A large part of homeownership is intrinsic and not financially driven. Buy the home you can afford when you feel the time is right.
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