Soaring Home Prices May Slow, but Burst Housing Bubble is Unlikely
Home prices are climbing similarly to pre-2008's Great Recession. Today's bidding wars have caused many home buyers to pay cash for homes or have to out bid competition by hundreds of thousands of dollars. However, the U.S. housing market is not destined to repeat the mid 2000's bubble that ravaged the the U.S. Economy.
Today's situation is different that 2008. Right now there is a shortage of inventory and home builders are not building a lot of new homes. Before the great recession, there was a surplus of new builds, now there are not. When there is a housing shortage, the prices won't decline.
The housing market is self-correcting. Home sales have been in decline the last few months. Instead of paying what they view as unreasonable prices , many potential home buyers have decided to wait or rent for the time being.
"Some buyers are simply being priced out," said Lawrence Yun, Chief Economist at the National Association of Realtors.
"This may be a blessing in disguise," said Markowska of Jefferies, pointing out that home prices may be able to cool off as inventories rise. "It elongates the housing cycle and prevents a boom-bust dynamic."
Another important factor is lenders are being responsible and smarter with who they lend to. No more no down payment loans. Hard lessons were learned during the Great Recession, especially home loans. Gone are the days of the NINJA loans ( no income, no job, no assets). People were receiving loans who were financially unstable.
Homeowners who had ARM (adjustable rate mortgages) loans got stung with an increase in borrowing costs, when the Fed raised the interest rates in the mid 2000s. Today the mortgage debt as percentage of disposable income is lower today at 3.45% than in 2007 at 7.2% This is an important factor. If there is too much debt to income the housing market will suffer.
"Less leverage means household balance sheets are better positioned to handle a decline in house prices," Bank of America economists wrote. "Therefore we are unlikely to see a wave of defaults, leading to fire sales."
Lessons learned are keeping the housing market stable for the remainder of 2021.
