If you think Macbeth’s witches had trouble, just wait. If the COVID-19 housing bubble bursts, it could be a replay of 2008.
To be fair, not everyone thinks there is a bubble. Many real estate professionals and economists feel there are plenty of new buyers in the real estate pipeline to keep the market rolling along, not to mention the low interest rates. But where, exactly, are we compared to the housing bubble in 2008 that led to the financial crisis? Well, there are some similar aspects, but a lot of different dynamics as well.
The banking giant UBS claims home prices are outstripping both wages and rents. While home prices have appreciated more than 60% since November 2012, incomes have only appreciated by 20% and rents by 30% over the same time period. However, unlike our previous real estate bubble, this time it is not being fueled by a breakdown in lending practices because of a combination of bad legislation and lender and investor greed.
Once the lending standards by the government-controlled agencies of Fannie Mae and Freddie Mac were downgraded, subprime loans were available to practically anyone. Remember low-doc or no-doc (document) loans as well as low down payment or no down payment loans? The objective at this time was a quality-of-life issue and getting people in a home of their own, which was a nice thing but a bad business decision. It opened the doors for homeowners with no skin in the game buying homes as well as investors just taking advantage of the situation.
Thankfully, that is not happening now. In fact, the lending standards have been extensively upgraded, making it difficult for homeowners without cash, jobs and good credit to get financing. This doesn’t mean we still don’t have a problem primarily with inventory. There are millions of millennials living with their families, unable to get out on their own, who will be looking for homes when the COVID dust settles and their careers get in gear.
This is why real estate professionals and economists still feel that long-term real estate will be a good investment; even if this bubble bursts there is something there to replace it. Until the Federal Reserve slows down their bond-buying, the interest rates will stay low, keeping the prices on properties high, and there has been no indication of the Federal Reserve reversing their policies any time soon. It’s possible to continue seeing 10% to 15% appreciation rates across the country. Although homeowners love to see this, it can’t be sustainable and definitely is not advantageous for helping those millennials to get out of their parents’ homes.
We do have one other potential bubble to worry about, and that’s homeowners who have taken advantage of the mortgage-relief programs the government put in place to help during the pandemic. These people are facing an end to the programs within a few months and many of them are not back to work or have totally lost their jobs. This is another important phase of the real estate market to pay attention to.
We are still in the midst of a powerful pandemic with millions of Americans out of work but in spite of this there is a real estate boom the likes of which we haven’t seen in 15 years. Bubbles come and bubbles go, and we can only hope we can navigate this one with more wisdom than the last. It seems there’s a Shakespeare verse for almost every part of modern life; now that’s real wisdom. Stay safe.
