If the recent home-buying frenzy has you caught up in a 2007 déjà vu, take a deep breath and repeat after me, “We are not in a housing bubble.”
As a home buyer, you’re probably having a bubble-like experience. You’re seeing rising demands, soaring prices, inventory shortages, and bidding wars. The housing market is in overdrive.
Even if you don’t have direct knowledge of the housing implosion that occurred in the mid to early 2000s, you’ve likely seen the comparisons. Some media financial “experts” believe that we’re in a similar bubble. Others predict that it’s destined to burst. Fortunately, financial safeguards and banking compliance strategies have diminished the chances of another disaster.
What is a Housing Bubble?
Housing bubbles have the same basic qualities as other financial bubbles. The Investopedia article, “5 Stages of A Bubble,” explains the identifiable stages as defined by economists.
- Displacement: Interest rates go down and buyers get excited. Prices increase. More people begin buying.
- Boom: Prices soar, drawing media attention and more buyers who don’t want to miss out.
- Euphoria: Soaring prices have no relation to actual values. New theories justify increased valuations.
- Profit-taking: Those who are paying attention begin selling off their assets.
- Panic: Prices and values fall. Demand drops. Some investors liquidate. Others lose out.
Mortgage Availability Helped Inflate the Housing bubble
During this period, banks and non-bank financial institutions profited by pushing high-rate mortgages, many to unqualified buyers. They bundled and sold mortgages to other institutions. Insurance companies insured banks against financial losses so they continued these practices. As home values decreased, these practices established a pattern of financial loss for homeowners.
Why Does it Seem Like a Housing Bubble?
Since the pandemic shut down the world, a lot of factors have contributed to bubble-like market perceptions. All of them have varied explanations
- Attractive interest rates: Bankrate’s review of historical mortgage trends shows that 30-year fixed mortgage rates have been dropping since the 1970s. They reached new lows in 2020 and have fluctuated only slightly since then.
- Home inventory shortages: Homes were already in short supply in early 2020. Pandemic-related materials shortages and slowed construction made it worse.
- Buying enthusiasm: The pandemic, changing lifestyles, working at home and other factors increased 2021 buying enthusiasm.
- Rising prices: Price increases are a natural result of supply and demand dynamics. Home prices are still high, but they’re stabilizing.
Regulations and Strategies Help Prevent Housing Bubbles
The dramatic 2007 mortgage crisis inspired H.R.4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. It included mortgage lending regulations and created the Consumer Financial Protection Bureau. This agency oversees financial products and services. It also prevents some of the lending practices that contributed to the housing market bubble and the subsequent financial crash.
- Banks and non-banks handle mortgages based on uniform guidelines.
- Borrowers must be highly qualified to obtain mortgage financing.
- More homeowners opt for fixed-rate mortgages instead of variable or adjustable rates that often increase monthly housing costs.
- Homeowners have higher equity in their homes.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, changed some of the Dodd-Frank banking regulations and protections. Fortunately, the CFPB is still in place to protect consumers from inappropriate lending practices.
Contact J Boswell Real Estate
If you want to know more about real estate bubbles, it’s easy to connect with us. Give us a call at (860)329-6085 or leave a message on our contact page.
