Episode 20: Is There a Bubble in Real Estate?

Isaac Wright: Hey! Glad to have you back here on Wright Money Tips. We’re going to have a really nice conversation today around a topic that a lot of you, if you’ve been paying attention to the price of your home and the price of real estate in general, it doesn’t take a rocket scientist to figure out that we’ve seen some good appreciation this year.
However, as we’ve seen the cost of homes and the cost of living go significantly higher this year, it’s also brought about the question, “Are we in another real estate bubble?” A lot of us remember what happened in 2007 into 2008 and runaway home prices. As you know, those prices obviously took a turn for the worst. And here we are just over 10 plus years later, watching the real estate market have some significant appreciation.
So, you’re going to really want to pay attention to today’s episode. We’re going to have a great conversation with our guest today, Ms. Kezia Samuel. Kezia is Vice President of Portfolio Management at AssetMark. Most importantly though, is that I’ve known Kezia for a few years and write some very good, insightful commentary around topics such as what we’re going to cover today. But with that being said, Kezia, welcome to the program.
Kezia Samuel: Thanks very much, Isaac, very kind of you. Yes, we have known each other over the long journey.
Isaac Wright: You’ve written some really good articles over the years. When I saw what you have written here, I definitely felt this was a great topic for people who are just trying to weigh out where they may want to go in their next steps with real estate. I don’t think we’ll give them a final answer, but we can definitely give them some things that I thought were pretty insightful from your article, Are We in Another Real Estate Bubble? And of course, as we finish today, we’ll link that article for anybody that wants to learn a little bit more about that particular topic.
But let me just start off with kind of the context of the article. And as I said, here on the introduction, we’ve had a lot of people in all honesty ask about, how people are able to afford the significant increases in housing? And we get questions like this. We also get questions more importantly, “Is this a scenario that I need to hold off because maybe in six or 12 months, we going to have another repeat of 2006? Another real estate bust?” Of course, you and I don’t think anybody has a hundred percent answer on that. But I thought that’s a great place to start our conversation today and if we could, get your take on what happened in 2007 and where things were hidden, relative to whether or not we’ll have another real estate bubble.
Kezia Samuel: On the surface, if you look at 2007, when we had home prices that were on a terror, it seemed like there was no end. But it was supported by a lot of low-quality mortgages, which then eventually led to the housing burst and the eventual financial crisis and the economic meltdown, not just in the United States, but around the globe.
So, on the surface, when you look at 2021 and compare that to 2007, yes, rising home prices certainly looks the same, but the fundamentals of what’s happening in 2021 are dramatically different than 2007. And I think this is where the article dove into. Yes, there’s concern, looks like another 2007, but what’s really happening?
And there are three key areas that we can dive a little deeper into. But our reminder of 2007, and home prices were really being set up based on rising inventory. There were a lot of bones. There was also a lot of issuance of low-quality mortgages and today things are slightly different than what we saw in 2007.
Isaac Wright: So, we’ll talk a little bit about some of the topics that you brought up in the article. But, I think that probably a great common denominator as far as getting the conversation off the ground, that this is the economic factors around, let’s call it, the housing economy, are a whole lot different than they were 14, almost 15 years ago now.
I think one of the main things, and I’d like to hear your take on this, that I saw in the article. And I do agree with this is the fact that mortgage rates are at all-time lows. Of course, that’s going to drive a little bit of, maybe more than a little bit, maybe a majority of some of these mortgage or let’s call it the real estate prices and people savings rates.
I don’t think people quite understand the fact of how much money is in our system. More importantly, the amount of money people have saved over the last 10 plus years. The market’s been really good. I thought that that was pretty insightful, but I would love for you to expand on that a little bit.
Kezia Samuel: Sure thing. Let’s just start with the mortgage rates. It’s surprising if you go back to the 1980s, when mortgage rates were a whopping 18.6, let’s round it out to 19%. And since then, it’s been a steady decline. You fast forward to 2007 and the average mortgage, and this is a 30-year mortgage we’re talking about, was at 6.5%. Let’s fast forward that to 2021 and we’re below 3% for a 30-year mortgage. So, what this means is as interest rates fall, that mortgage rate is now below 3%. The amount of income you have to spend to pay your mortgage payments is much lower, allowing for home affordability. I know this sounds surprising, is actually more affordable today than it was back in 2007.
And that’s simply a function of, “If I don’t have to spend as much of my paycheck on my mortgage payment, I have more money to actually keep back to myself.” But that’s not where the story stops. And this is where you alluded, which is savings rates surprisingly has also gone up. Now 2020 with COVID, most of us were stuck at home, not able to spend on things that we naturally spend on. And so that took the savings rate higher. But add to that, some of the supplement that came from Congress in terms of the stimulus checks that came along. That doesn’t mean that no one was impacted by COVID, certainly there was a swath of folks that it was financially hard. But overall, the savings rate rose to one of the highest we have seen in history at two and a half trillion dollars.
That is, we can’t spend your money and you have additional stimulus money coming through. This bolstered the U.S. savings rate to the highest records that we’d seen history. Finally, that’s not where the buck stops. And this is the stock markets have been brave. You look at your 401(k) or your IRA accounts, the rising stock market has also bolstered, not just your savings, but also investment accounts. You tie all these three things together, low interest rates, so I can keep more of my paycheck without having to pay my mortgages, add to that, my savings went up because I didn’t spend, and my investment accounts are higher.
All of this has created an environment where we look at what percent of the highest household income actually goes to a mortgage payment. Today is at record lows, even though the median home prices have gone up to record highs. So, it’s more than just what home prices they’re doing. It’s all of the other factors that are also driving affordability, which today is at a much better state than 2007.
Isaac Wright: I think that’s extremely well said. I don’t even know if I want to add to that. The takeaway, obviously from that as the fact that when you look at the interest rate environment, the savings rates that we’re in, and again, as a percentage of income, even though the pricing of housing has gone up substantially and including high housing apartments and all the above under most circumstances, of course, there’s always going to be some what ifs and some people that get left out.
But the overwhelming majority of people that are in that boat are in a, let’s say, a favorable position financially. And I think probably too, if I could just add, the rising prices of homes, especially for people that have been existing homeowners, obviously they’re being able to clip a pretty good amount of money off of a profit to turn around into another piece of property or real estate or another primary residence.
To me, because I think a lot of times, with the news everything’s doom and gloom, be careful, I just thought it was a really strong argument. You know, looking at kind of the background economics of where a lot of families are today. I guess, maybe just to kind of summarize that too, I feel like generally speaking, the financial health of a home buyer, you mentioned this in the article, but really strong. I mean, overall, that’s probably been the key factor in some of the things that we just finished talking about.
Kezia Samuel: And that’s another key differentiator from 2007. And I think you could go back and again, sensational headlines. But if you remember back in 2000, but no income, no verification, no down payment types of mortgages were very common.
Today, lending standards, Isaac, are vastly different. And 2007, certainly taught not just the consumers, but also the lenders are some key, valuable lessons. And how do you see that? An easy way to see this is if you were to look at the number of mortgages that are being issued to consumers with high credit scores, which typically is 760 and above and low credit scores.
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 polar opposite. In fact, as of the first quarter in 2021, nearly 73% of all mortgages have been issued to those with those high credit scores. So just shows us that with that high savings rate we talked about, the consumer that is applying for those mortgages, it’s not these low-quality mortgages that we saw in 2007. The consumer is in a much better financial state today than in comparison to 2007. Quite a different scenario from 2007 to where we are today, and that is important to highlight.
Isaac Wright: And so, again, economics I think transcended all that data. I know inside of the article; I know we don’t have it in front of us today. I know it has some nice charts to be able to kind of emphasize some of these points we’re making. Of course, in addition to the financial side, the supply of housing in general, I think that was a key determinant in a way of kind of having a positive spin on some of the information that you’re already covering. But maybe give a swipe if you will, to our listeners and viewers about the housing supply side of the fence because I think equally that’s,
Kezia Samuel: Indeed. I mean, we talked about the demand side of things. We know that everyone has to be fast when you see a house you like, so the demand is high. But on the supply side, if you remember in 2007, there were cities with no one living in them. Supply was high in 2007. But since 2007, the supply of single, I’m using this as a sample statistic, single family homes that are available has sharply fallen. And then there’s a chart there that shows the number of single-family units available in 2000, right before the crash, was around 1.8 million new homes being built. From there, it crashed all the way down to 400,000. And since then, has not quite kept pace. In fact, it has never come up to the 2007-type of single-family homes being built. So, supply has been constrained and that could be for a variety of reasons. And many of the home builders fell out. They were hurt in 2007. There’s also a higher cost for labor, as well as raw materials.
I don’t know if anyone’s tried to do renovations recently. Have you seen the prices of lumber? I mean, you know firsthand what this means and so yes, there’s a plethora of reasons why that is. But the supply side has also remained constrained and has not come back to the 2007 levels and you pair that with high demand, and it’s a classic reason for why home prices have been rising.
Isaac Wright: Well, I know maybe it wasn’t kind of in the end of the article, but while I got you, I do want to ask you just a question in your opinion, “What is your projection with the next 12 or 24 months? How are you feeling? Are you feeling basically?” It sounds to me that the real estate, housing market, where could it be? I guess, where is a headwind with interest rates rising or all of a sudden, tons of homes are being built. I’ve seen a lot of, at least in our area, I’m seeing a lot of apartments and townhomes being built; kind of community living, if you will. I don’t know if that’ll start helping eat into some of the supply chain, issue. But long story short, anything you want to add?
Kezia Samuel: So, two things as we talk about, as we take away from this article. First, is a reminder that just because some prices go up, does not naturally mean that all things are in a bubble. And often that’s the case, right?
When something rises, eventually it has to be in a bubble. But where we are the underlying dynamics of the markets and the fundamentals of the economy, don’t really support. But we are seeing a real estate level. So that’s the first point and just clarifying that out. As to where it goes? It’s likely if the Fed raises interest rates, perhaps mortgage rates likely will rise.
In line with that down the road, and that may pull back some of the affordability, but housing supply is likely to remain constrained. You can’t turn around and build that many houses to meet the already, gap in demand. So, it’s likely that elevated home prices will remain. I certainly don’t have a crystal ball in terms of when that tide turns around, but we certainly don’t see a bubble in the horizon just given the sharp contrast between demand and supply as it stands today.
Isaac Wright: Kezia, I’m going to wrap us up on that. I think it’s a great way to summarize the article. Again, we’ll have that linked to our Wright Money Tips site. Again, just want to thank you for taking the time today. I know you stay busy and I know you’re in charge of quite a lot. I appreciate you pulling a few minutes here to talk to us, our viewers, our listeners, for all of you today.
If you have any concerns about your real estate situation, maybe where you stand in terms of your mortgage, feel free to give us a call anytime, or reach out to us here on Wright Money Tips. Kezia, again, thank you so much and we look forward to talking to you again soon.
Kezia Samuel: Absolutely. Take care. Thank you.
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