Is There a Bubble in Real Estate?

As the prices of homes and the cost of living has increased significantly this year, it has raised the question, “Are we in another real estate bubble?”

Many of us remember the turn of events that took place in 2007 and 2008 with runaway home prices. The subprime mortgage crisis caused a global financial and economic meltdown, resulting in the Great Recession. Fast forward to 2021 and we’re seeing similar appreciation trends that we saw just over a decade ago.

While rising home prices have many worried that we could face another bubble, the real estate landscape is very different. Read on to learn how differences in economic factors are shedding some light on this unique situation.

It’s Comparing Apples to Oranges

When you look at 2021 and compare that to 2007, rising home prices certainly looks the same. But the fundamentals of what’s happening today to the events that took place in 2007 are dramatically different. Comparing the quality of mortgages, interest rates and the appreciation in home values between 2007 and 2021 is like comparing apples to oranges.

Interest and Savings Rates

If you go back to the 1980s, mortgage rates were a whopping 18.6%. Since then, there’s been a steady decline. In 2007, the average 30-year mortgage was at 6.5%. By 2021, that rate for a 30-year mortgage fell below 3%.

What this means is that as interest rates fall, the amount of income you have to spend to pay your mortgage is much lower, allowing for home affordability. While prices seem higher than 2007, it’s surprisingly more affordable to purchase a home today because of the interest rate environment.

Additionally, the savings rate has also increased significantly. As a result of COVID, we were not able to purchase the goods and services that we typically spent our money on, thus changing our spending habits and contributing to the higher savings rate.

Some of the supplement that came from Congress in terms of stimulus checks was another benefactor. That doesn’t mean that some of the population was negatively impacted by COVID. There were a swath of folks that faced financial challenges and hardships but overall the savings rate rose to one of the highest that we’ve seen in history at $2.5 trillion.

The Quality of Mortgages

In 2000, a home buyer was not required to provide income verification or a down payment to qualify for a mortgage. Today’s lending standards are vastly different as a result of 2007; teaching not just the consumers, but also the lenders some valuable lessons.

In 2007, the number of mortgages being issued to consumers with low credit scores was actually higher than those being issued with high credit scores. Today, it’s the exact opposite. In the first quarter of 2021, nearly 73% of all mortgages issued were to home buyers with a credit score of 760 or higher.

This just goes to show that the consumer that is applying for those mortgages is in a much better financial position today than in comparison to 2007. A very different scenario from a decade ago and that is important to highlight.

The Supply Factor

Supply for homes was very high in 2007. There were cities with no one living in them. Since then, the supply of single-family homes has sharply fallen. Before the Great Recession, there were around 1.8 million new homes that were available for purchase. From there, it crashed all the way down to 400,000. New home construction has not quite kept pace.

As a result, supply has been constrained and for a variety of reasons. A number of home builders fell out because of the recession. There’s also a high cost for labor, raw materials and overall has stymied the supply side to far lower than 2007 levels. Pair that with high demand, it’s a classic reason for why home prices are on the rise.

If you’re interested in having a conversation about your financial assets and retirement goals, consider talking with one of our financial planners at Financial Dynamics & Associates, Inc. As a firm focused on creating customized retirement plans in the Midlothian and Richmond, Virginia metro area, we may be able to help advise you based on your overall financial situation.

This information is not intended as a solicitation or an offer to buy or sell any security or investment product. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities.