Are we in a bubble?
As discussed in The Real Investor Podcast episode #6—Are we in a Housing Bubble?— it's believed that the notion that we are currently in the midst of a national housing bubble is false. While the concern over an impending bubble burst is a common source of discussion within the industry, it’s important to fully understand the factors that contributed to the housing crisis back in 2005. In this post, we will contrast past and present market conditions, identifying three primary indicators that suggest the real estate growth we are experiencing now is sustainable.
Reason #1: Reformed Mortgage Acceptance Practices
Bad loans were at the root of the housing crisis. The market was propped up on risky subprime loans made to borrowers with demonstrated credit risk regardless of their actual creditworthiness. As a result, homeownership skyrocketed. Banks were profiting from these loose regulations—annual origination for these loans was nearly $620B in 2005. Comparatively, because it’s much more difficult to get financing today, subprime loan origination has plummeted significantly.
Reason #2: New Construction has Slowed
With almost anyone able to get a mortgage, home ownership rates went through the roof. Demand was high and real estate supply was low, resulting in skyrocketing new home construction rates in an attempt to meet the market’s needs. In 2005 there were 1.3MM new homes built—the highest number in 52 years! Today new home construction is down 61% from the 2005 peak.
Reason #3: Home Price Appreciation has Stabilized at a Natural Rate
Pre-housing crisis, speculative appreciation fueled unnatural home equity accrual. The market was further destabilized by buyers who banked on quickly flipping new homes for a profit. The collapse that followed caused steep depreciation in home values before they began gradually rebounding over time. Today, homes are appreciating at a natural rate, creating a stable market.
It's important to recognize that the state of individual markets may vary from the trends we see nationally based on a variety of economic and demographic factors. For example, in markets like New York and San Francisco dramatic price appreciation has created a risk in that, there are only so many buyers who are able to afford such high-dollar properties. Conversely, there are markets like Denver and Dallas in which aggressive home price appreciation is economically justifiable. Both geographies have sustainable and diverse employment, organic job and population growth, and offer a high quality of life.
Declining home ownership rates mean more renters in the market, presenting a strong opportunity for investors in the space. Declining vacancy rates and rising rents make now a great time for investors to expand their real estate portfolios. The key to weathering potential storms is to have an exit strategy and make data-informed decisions that demonstrate viability.