What’s the biggest question being asked around the water cooler?
True, we aren’t standing at water coolers anymore, we are in our home office, also known as our kids classroom, aka our ‘at home’ gym, and watching the news, asking friends over the phone, and searching online, “When will the housing bubble pop?” Google reports this question has spiked over the last month 2450%. I myself have had numerous conversations with buyers, sellers, and extended family alike. The answer I give, it won’t pop,,, because we aren’t in a bubble.
New Construction is just starting to get back to level of new housing starts we saw before the market fell in 2007/2008. During the 2010’s, housing starts were an average of 20,000 less per million people. Fast forward twelve plus years with America’s population topping 3.2 million people, that is easily over 750,000 homes short for traditional growth.
Millennials, the largest generation by population the US has seen, are starting to buy homes. Many hit hard by the earlier recession, held off buying homes in their 20’s, an age many previous generations had started buying homes, and have instead spent the last 10 years going to college, traveling, and saving money. They are now entering the market in great numbers, ready to buy their first homes.
Lending has made a 180 after the last recession and became much tighter in practice. Gone are the stated income loans with no documentation, the negative amortization interest only payment loans, adjustable rate mortgages that recalculated at a new rate and monthly payment after being fixed for 3-5 years, and 80/20 loans where buyers could get into a home with no money down. Buyers over the last decade have had to prove their income, put money down to purchase and have seen the economy steadily recover and grow, allowing equity in their home to grow, while paying monthly payments of principal and interest, greatly based on fixed 30 year rates.
Another factor of the high demand is mortgage rates at historic lows hovering just above or at 3%. For every quarter of a percent a rate drops, the average borrower can qualify for an additional $10,000-$12,000 to purchase a home, making buying power not only greater, but opening the door to a larger number of people that can afford home ownership.
Enter the pandemic. A historic year when people were stuck at home. Many ‘would be’ sellers were afraid to sell, reducing the number of resale home we typically see come on the market, normally helping to keep a steady flow of inventory. There has also been an influx of people moving out of cities to out lying areas, many in search for a bigger home with more space to accommodate the new found realities of our entire lives of work, school, gym, etc., happening within our four walls.
Adding these realities together, more buyers by generational standards, less resale homes coming on the market, a continual shortage of newly built homes and historical steady low rates allowing more buyers to qualify for homes, have fueled the perfect storm. The question lingers, what about forbearance and people not making mortgage payments? Though many took the opportunity to hold off on making mortgage payments, data shows a large percentage of people have returned to making their monthly payments. Those that have not, many lenders are starting to work out payments plans, while others are adding the payments to the end of the mortgage, effectively increasing the payoff timeline. The government has extended the forbearance window in the hopes that Americans will get back to work and be able to get back to making their payments. All this being said, if it comes to a point where a foreclosure looks inevitable, I foresee the home owners listing to sell. They have been accruing equity value here in Oregon over the last year of about 12% give or take a small percentage based on area, almost 3 times the norm. The average yearly growth in value of a home prior to this lack of supply and high demand has normally been recognized as 3-5%. This results in having homeowners that had to pay into the equity to purchase their home, the change in lending regulations requiring payment of principal with their monthly payments and have over the last year, accrued additional equity value in their home due to supply and demand greatly increasing home values. We may see more resale homes come on the market, but more and more it looks like possibly enough to slow the growth of equity and growth of increased home prices, but not stop or reverse either.
If you are looking to purchase, now is still a great time to buy. If you have thought about selling, having a lack of competition with high demand is always a recipe for great return. If you’ve been curious about any of this, or have toyed with the idea of buying or selling, let’s chat!