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Are we in a housing bubble?

Ever deep-dived into Zillow and imagined that sunlit office? Let's pop the bubble on housing market myths and serve up some real talk for homeowners and daydreamers.

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January 30, 2024

5 min read

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      The Zillow Obsession and Beyond

      We know you’ve done it. You’ve checked Zillow to see what a friend paid for their new house. Or, like us, maybe you accidentally spent two hours browsing homes in an Idaho town you’ve never heard of, saying things out loud like, “That room is perfect for my office, but I’m a little worried about the natural light in the afternoon.” 

      Understanding Today's Housing Market Dynamics

      Residential real estate is an asset class like no other. The idea of homeownership is overloaded with emotion, fueled by countless reality TV shows, and it’s the thing that keeps so many of us working as hard as we do. To add to the drama, the housing market also regularly takes us for a ride with its boom-bust cycle.

      After a few years of truly insane house price increases – like in Spokane, WA where prices soared 60% during the pandemic – are we in a housing bubble that’s about to pop? And how much will it hurt? 

      Here’s how housing bubbles play out: It starts with “exuberant demand” from homebuyers combined with above-average increases in home prices. This situation usually happens after a period of sustained economic growth and strong employment. As housing demand outpaces supply, institutional investors and speculators jump into the market and push prices up even more. Finally, the bubble pops – homebuyers are unwilling to pay the high prices and supply catches up with demand. That’s when prices take a dive. 

      So, let’s review. Exuberant demand? Check. Historically low interest rates, higher-than-average savings, and the freedom to work from anywhere sent home sales into overdrive in 2020. Speculators pouring fuel on the flames? Check. There was an upswing in institutional investors, especially in places like Atlanta where investors bought 32.7% of all homes for sale in 2021. Sharply falling prices? Not so much…yet. Average home values declined for the first time in a decade in July, but it was only by 0.1%. The biggest decline was spotted in San Jose, CA with a decrease of 4.5%. It’s very possible that prices will continue to fall, but so far they’re not falling off a cliff. 

      Lessons and Echoes from the 2007-08 Crash

      If this is giving you flashbacks to the absolute chaos and devastation of the 2007- 2008 housing crash, we have good news for you! The housing correction we are probably about to experience won’t feel like that. Why? 

      The major cause of the ‘07-08 housing crash was sketchy subprime lending practices by banks. Too many people were allowed to borrow money through mortgages they couldn’t afford, especially when interest rates started rising. Also, banks turned around and sold these subprime mortgages to other banks and investors in the form of mortgage-backed securities. Those investment products were all the rage…until rates went up and borrowers started defaulting. The housing market and stock market don’t typically move in tandem, but in this case, the popularity of mortgage-backed securities had spread the danger of a subprime mortgage crisis into the financial system like a cancer. The dominos started falling, ultimately causing a banking crisis and stock market crash. US household wealth decreased by *~*$19,200,000,000,000*~*!  

      Today, regulations prevent the above scenario from happening again, and the mortgage industry is on much more solid ground. Only 8% of borrowers are using risky adjustable rate mortgages (ARMs) compared to 36% before the ‘07-08 crash, and mortgage delinquencies are at an all-time low at 3%. 

      Navigating the Future of Housing

      So, the housing correction that’s coming won’t feel like doomsday all over again. If you are a homeowner who bought a home near the top of the market, take a look at this chart from Feb’22. Even with a large decrease in value like 20%, prices would still be above what they were at the peak of the housing bubble before the last housing crash. You won’t feel great about it, but as long as you can afford to stay in your home, it is still a good long term investment that is likely to appreciate in the long run. 

      Which brings us to the much bigger problem we’re facing when it comes to housing: housing affordability. Across the country, the US needs millions more homes than it currently has available to rent or buy, and that’s a problem that will keep pushing prices unreasonably high until it’s solved. That shortage contributes to the fact that seventy percent of millennials can’t afford a home.

      So, the good news is that homeowners are probably going to be ok if housing prices take a hit. The bad news is that buying a home is still going to be out of reach for so many people. 

      The Playbook take 

      If you own a home, take a deep breath and don’t panic about the headlines of an impending “housing crash.” If you don’t own a home and want to, a solid financial plan is your best shot at getting there. It will help you save money in a smart way, find tax advantages you’re missing out on, and get you ready for that big down payment. (Cheat code: you can get a financial plan from us just by signing up for a free trial!) 

      To financial freedom and beyond

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