Rapidly rising home prices are igniting fears of a home price bubble, reminiscent of the Great Recession. Are these fears founded?
Some forecast a markedly different real estate market than the one that occurred when prices peaked in 2006 and began plummeting in 2007, bottoming in 2009 during the Great Recession. Zillow is one such forecaster, with their argument hinging on today’s:
- low supply;
- high demand; and
- mixed financial conditions.
Regarding supply, the level of homes for sale in 2021 is the opposite as during the leadup to the Great Recession. Inventory is tight, leading to increased competition. The lack of homes available contrasted with increasing demand results in the rapidly rising prices we have seen transpiring throughout 2020-2021.
Contrast this with the situation in 2008. During this time, over-building of homes was common prior to the crash. This over-supply of homes was combined with loose lending standards requiring little to no documentation that homebuyers were able to pay. The result was a tidal wave of foreclosures that swept the nation. Demand plummeted, along with prices. Distressed homeowners were plunged underwater. Unable to sell and unable to pay, foreclosures piled on in a vicious cycle.
Zillow notes that today’s low mortgage rates and demographic shifts – namely Millennials becoming first-time homebuyers – has influenced demand for housing.
Beginning in March 2020, the Federal Reserve (the Fed) lowered their benchmark interest rate to zero with the Fed intending to keep their benchmark interest rate near zero until at least 2023. According to Zillow, these historically low interest rates influenced some homebuyers to enter homeownership sooner than they had planned. The larger impact from the lowered interest rates have been increased purchasing power and thus rising prices.
Demographically speaking, the population of 25-34 year-olds, comprised of Millennials, is growing slightly each year. This largest generation since the Boomers is reaching their prime homebuying years. The median age of first-time homebuyers is in the early to mid-thirties, an age over 6 million Californians are approaching. With this massive generation entering typical homebuying years, expect the housing market to maintain a steady level of demand.
Financial conditions are the final piece to the puzzle creating a picture of stability. The foreclosure moratorium currently in place prohibits lenders from initiating foreclosure until July 1, 2021, unless it becomes extended again. While some homeowners under financial distress may lose their homes to foreclosure, and some tenants will likely be evicted, they are not all expected to be foreclosed on or evicted en masse.
One way homeowners experiencing a COVID-19-related financial struggle may avoid foreclosure is by requesting a mortgage forbearance for up to 180 days, which allows their servicer to temporarily forgo their right to pursue foreclosure while the homeowner initiates actions to bring their mortgage current. The Consumer Financial Protection Bureau (CFPB) also modified its mortgage lending rules to include a temporary moratorium on most foreclosures through the end of the year, providing an extra relief for delinquent homeowners.
Today’s conditions are much different from the financial fallout of the 2008 era. Notably, the real estate market remains an outlying strong point in the economy, despite the ongoing recession.
No crash and burning – so what’s next for real estate?
While the housing market is not expected to crash and burn as it did during the 2008 recession, there are still several worrying signs real estate professionals need to watch for in the months ahead. Not everyone will emerge unscathed.
The main sources leading to real estate instability are the expiration of the foreclosure moratorium, a lack of a jobs recovery and a shortage of residential construction.
First, the foreclosure moratorium, keeping delinquent homeowners from being foreclosed upon, is scheduled to expire in mid-2021. A wave of distressed sales will drag down home values a few short months after it expires. True, some distressed homeowners will be able to avoid a distressed sale by entering a forbearance program, but many of these seriously delinquent homeowners will be forced to sell their home.
Next, jobs in California are still below where they were in 2019 by 1.7 million, as of March 2021. The number of jobs in California directly impacts homeownership across the state. Access to reliable income allows individuals to become renters and homebuyers, and without it, Californians cannot make payments on their rents or mortgages.
Finally, residential construction is well below what is needed to meet demand, restraining sales volume. Extensive and frequent legislation aimed solely at motivating builders to build residential property will culminate into producing at a pace that will increase inventory. This uptick in inventory will accelerate into an overbuilding situation within four years after the upward trend begins of year-over-year starts.
With less construction of low- and mid-tier housing, jobs yet to be recovered from the ongoing recession and foreclosures expected to flood the market later this year, the real estate market still has obstacles ahead which will pull down prices. With reduced equities, homeowners who have purchased in the last couple of years will be in a vulnerable position, especially if they have lost their sources of income.
firsttuesday anticipates a recovery from the ongoing recession to begin around 2024, depending upon the extent of federal initiatives to increase job growth and any future extensions of the moratoriums.
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