A real estate bubble occurs when there is a rapid and unjustified increase in housing prices. Often this is caused by speculating investors blowing some hot air š¬ļø
Like an overfilled balloon š, the bubble eventually pops, and then a swift drop š in home values occurs. This leads to reduced equity or, in some cases, even negative equity š±
Fortunately, economists donāt foresee that happening! š®
Prices are going up because thereās a very low supply (homes for sale) and high demand (lots of buyers). And those market dynamics arenāt expected to change any time soon.
š Looking for guidance as you navigate this fast-moving market? Contact our team to learn more about current real estate trends and whether now is a good time to buy or sell.Ā
While many areas of the economy have contracted, the housing market has stayed remarkably strong. Can the good news last?
COVID-related shutdowns began in March, real estate brokers and clients scrambled to respond to the change. Record-low interest rates led lenders to stop new underwriting, and homeowners debated whether to put their homes on the market. At the end of the year, average home prices were up 13.4% from the previous year, and with 13 fewer days on market .1
Now, as the spring market approaches, you may wonder whether the reliable times can continue. If you are a homeowner, should you take advantage of this opportunity? If you are a buyer, should you jump in and risk paying too much? Below, we answer some of your pressing questions.
Todays market vs. the 2008 meltdown?
Pandemic fears of an economic recession and a subsequent mortgage meltdown were at the forefront of homeowners. For buyers and sellers the two seemed to go hand in hand, as they did in the 2008 economic crisis.
The conditions of 2008 recession differ from the current downturn, with the housing market the source of good news.2 Historical patterns of housing prices remain stable. Homeowners are staying put, and investors are investing money in bricks and mortars to avoid an uncertain the stock market.
Lessons of 2008 show banks better funded, homeowners holding more equity, and economic activity focused on financial factors outside the housing market. As many industries quickly pivoted to work from home, early fears of widespread job-loss foreclosures have failed to occur. The Federal stimulus and the Paycheck Protection Program helped offset some of the worst early effects of the shutdown.
Are we facing a real estate bubble?
A real estate bubble occurs with rapidly rising housing prices and investor spectulation. When the values drop rapidly the real estate bubble pops. This leads to lower equity, or in some cases negative equity conditions.
Low-interest rates and lack of homes are attributed to current rising home prices. The principle of supply and demand works as it should. Experts predict a strong seller’s market for 2021, with increases in new construction.3 Allowing supply to gradually rise to meet demand, slow down rising home values, and offer a gentle correction.
Effects of low interest rates
Freddie Mac states, projected rates to continue at current low levels throughout 2021.4 Contributing to home affordability in markets considered overpriced. These low interest rates should keep the market lively and moving forward for the foreseeable future.
Effects of low inventory
Low inventory with high demand attribute to higher average home prices.5 Home prices will gradually ease, vaccinations rollout, buyer demand drives homeowners with delayed sales, and new home construction increases to meet demand.6
Arenāt some markets and sectors appearing soft?
Stories of young professionals and families fleeing attached dwellings, high-priced urban areas to move to wide-open spaces of suburban and rural markets. Along with reinforced work-from-home policies that became permanent at some of the countryās biggest companies.
The death of the city and the end of the condo market rumors of these two residential sectors were greatly exaggerated.
With vaccine rollouts, renters returned to major urban areas, attracted by the rise in available inventory and discounted rental rates.7 Laser-focused buyers looking for a single-family home now take a second look at condos.8 Nationwide condo prices lag behind those of detached homes. Observed are significant price increases and days fewer days on the market year over year.
The 2020 migration has spread the economic wealth to suburban and rural enclaves that normally donāt benefit from increases in home values or an influx of new investment. As many of these new residents set up housekeeping in their rural retreats, theyāll revitalize the economies of their adopted communities for years to come.
How has COVID affected the āseasonalā real estate market?
The real estate market is a seasonal phenomenon. The widespread shutdown in March 2020, which came at the beginning of the marketās growth cycle in many areas, has led to a protracted, seemingly endless āhot spring market.ā
Fannie Mae’s chief economist Douglas Duncan predicts slower growth from 2020 historic numbers, the outlook is positive as we embark on the 2021 spring selling cycle. Duncan expects an additional boost in the second half of 2021, as buyers return to business as usual and expect to put some of their pandemic savings to work for a down payment. We’re looking at a longer than usual, hot real estate market.
How will a Biden administration affect the real estate market?
A projected housing policy promises to boost the real estate market in many cases.10 Real estate investors bemoan proposed changes to 1031 Exchanges, the Biden plan for a $15,000 first-time homebuyer tax credit aims to increase affordability and bring eager new home buyers into the market. Biden’s policy identifies low inventory as the driving factor of unsustainable home values and geared towards affordability through investments in construction and refurbishment.
According to most indicators, the real estate news will be overwhelmingly positive throughout 2021, and possibly beyond. Pent-up demand, consumer-oriented policies, and a sustained low-interest environment and rising inventory, should help homeowners maintain their increased equity without unbalancing the market. The increase of long-term work from home policies promises to boost many markets now and in the years to come.
HAVE QUESTIONS? WE HAVE ANSWERS
Economic indicators and trends are national, real estate is local. We are here to answer your questions and help you understand what is happening in your neighborhood. Reach out to learn how these larger movements affect our local market and the value of your home.
