Matthew Gardner Op-Ed: Why fears of a housing bubble are wildly overblown

This op-ed by Matthew Gardner was a part of a series on Inman News featuring views from housing experts about the potential for a 2021 housing bubble.

 

On face value, I can certainly see why some are worried about how much home prices have been escalating — not just during the pandemic period, but since housing prices started recovering back in 2012.

 

Home price growth has been outpacing wage growth for a long time, with median prices up more than 113 percent since January 2012, while wages have only risen by a far more modest 30 percent.

Moreover, in 2020, prices increased by more than 9 percent and were up by a record-breaking 17.2 percent between March of 2020 and March 2021. As a result, mumblings of the imminent bursting of a new housing “bubble” are now being heard far and wide across the US.

 

I’d like to start off by addressing those who believe impending doom is on the horizon. I am afraid I have some bad news; it’s not going to happen.

While it’s easy to argue that such a rapid increase in home prices is sure to end badly — as it did in 2008 and 2009 — you would be wrong to conflate these two time periods. Today’s housing market is markedly different from the one we saw back in the 2000s.

 

Allow me to explain why.

For more than six years, we have suffered from a woeful lack of homes to buy in the U.S., while simultaneously adding almost 10 million new households. Obviously, not every new household translated into a new homeowner, but given demographic growth and the ongoing shortage of inventory, it was enough to tip the scale between supply and demand, resulting in rapidly rising home values.

So, why are there so few homes for sale?

This is probably one of the questions I get asked most. The first reason is that Americans aren’t moving as often as they used to, which limits supply. In the early 2000s, we used to move an average of every four years, but the number today is over eight years. If there is less turnover of homes, supply remains scarce, and prices rise.

The next thing we need to consider is the new construction market, which has the ability to equalize supply with demand when enough homes are being built. But in recent years, the number of newly built homes has tracked well below the levels needed to help create a balanced market.

Furthermore, the ongoing escalating cost of building materials has led to higher priced homes being built, which doesn’t fulfill the lower end of the market where there is the greatest demand.

 

So far, the scenarios described above are entirely opposite to those of the late 2000s, but there are several other reasons why we are in a very different place today compared to the pre-bubble days.

Much like the current market, demand for housing in the 2000s was very strong, but a major difference between the two markets is that much of the demand back then wasn’t actually real — and certainly not sustainable.

Renters were becoming homeowners in record numbers, and people were snapping up investment properties who, quite frankly, should never have been allowed to. Lending policies were so lax that qualifying for a home was far too easy, which ended up being the principal reason why we saw a housing bubble form and subsequently burst.

Without a doubt, the lack of credit quality is the most significant difference between today’s market and that of the 2000s but gone are the days of “low-doc” or “no-doc” loans that allowed buyers to essentially make up their income to qualify for a mortgage.

 

Instead, according to Ellie Mae, what we saw in 2020 was 70 percent of mortgage originations going to borrowers with proven FICO scores above 760, and the average credit score over the past five years was a very high 754.

Although sub-prime borrowing still exists — and there is a rational place for it — the share of borrowers with a credit score below 620 was just 2 percent last year. For comparison purposes, it was 13 percent in 2007.

It’s also worth pointing out that back in 2004, a full 35 percent of mortgages were ARMs, or so-called “teaser loans.” When the rate reverted on these loans, it forced many homeowners into foreclosure because they could no longer afford the monthly payment. Fast forward to today, the share of ARMs in March of 2021 was just 2.4 percent.

 

Finally, I like to look at mortgage credit availability, and the Mortgage Bankers Association has some very rich data on this. The MBA’s index, which is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.), acts as a very useful bellwether when it comes to the health of the housing market.

Although the index has been rising since last fall (suggesting more freely available credit), it is still 85 percent below where it was in 2006, suggesting that lenders remain cautious.

The bottom line is that credit quality and down payments are far higher today than they were in the pre-bubble days, and mortgage credit supply remains very tight relative to where it was before the collapse of the housing market.

 

So far, I am not seeing a correlation with the “bad old days” — are you?

It’s irrefutable that home prices have been increasing at well above average rates for several years now, and that is cause for concern, but not because of any impending bubble. Rather, what concerns me is the impact rising prices is having on housing affordability.

Current homeowners are in good shape and, according to the most recent Federal Reserve Financial Accounts of the U.S. report, are currently sitting on over $21 trillion in equity.

 

Furthermore, the latest data from Attom Data Solutions indicates that over 30 percent of homeowners had at least 50 percent equity in their homes at the end of last year. But this doesn’t help first-time buyers who are so critical to the long-term health of the housing market.

Keep in mind, there is a wave of first-time buyers coming; over the next two years, 9.6 million millennials will turn 30, and Gen Z is close on their heels. Given where prices are today, the question should be: Where will they be able to afford to buy?

This, in my opinion, is a far bigger issue than any mythical bubble bursting.

 

To find this and the other pieces in the series, click here.

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