Is American real estate exposed to a new bubble in 2021?

In the US, the real estate market, Bitcoin, and Tesla stocks are often grouped as experiencing a "bubble", due to sharp price hikes. True, the median sales price of a home in the United States was $314,300 in December, up 93% over the last 11 years, according to the National Association of Realtors. But this graph shows that the force behind price increases is a lack of supply, not a frenzy of speculation or a "bubble".

The situation is no different from 2008

The rate of vacant homes for sale in the United States peaked in 2007 and 2008, when it was only 3%, during the real estate crisis and the bubble already in the real estate market. Contractors were building homes faster than people in the United States could buy. And it took a while, but eventually, prices fell again, people defaulted on their mortgages, the US economy suffered, which reflected on the global economy, and we had the global financial crisis.

The situation today is not much different. The rate of vacant homes for sale has reached 0.9%, which is the lowest rate according to US Census Bureau data since 1956. In other words, there is a short supply of homes this time, not excess as in previous cases.

To be clear, this doesn't make us very happy, even if the homeowners themselves are happy to see the value of their property go up. And that's keeping in mind that affordability drops, especially for first-time buyers.

unhealthy market.

The shortage of moderately priced properties is unfortunate. The National Association of Realtors' chief economist, Lawrence Yun, told Bloomberg that the current market is unhealthy, but it's not a watershed sign of a bubble.

When asked by Laurie Goodman, the veteran real estate analyst who spotted the recent property bubble when she was head of fixed income research at Swiss Bank from 2004 to 2008 and is now director of the Urban Institute's Housing Finance Policy Center, she said she didn't think the market was in the real estate bubble phase. The behavior of home builders and contractors has shifted to extreme caution after the recent property bubble burst. She added that the number of units produced annually is less than the rate of increases in families. It means the net increase in units offered, excluding homes that have been demolished or uninhabitable. Goodman says that there is an imbalance in supply and demand, and in return, it is moving very slowly to correct the issue, but the situation is still bad.

The lowest level of supply

During August and September of last year, the lowest level of supply for sale of pre-owned homes since 1963 was recorded. There were only enough homes on the market to cover three and a half months of sales. Assuming no more homes are built. This is according to data collected by the Statistics Office. Supply increased slightly after September, but the July through November average was still lower than all months in previous years, except for the six months from 1963.

One of the factors of strong demand is the spread of the (Covid-19) epidemic, and many people went to live in homes instead of apartments, and the encouraging factor for them was the availability of cheap loans, in addition to that, mortgage rates fell so dramatically that the average monthly payments For him, it fell over the past year despite the price hike.

Indeed, if mortgage rates rise again, home prices will also rise, but there are two observations here. The first is that most people have fixed-rate mortgages. According to the Mortgage Bankers Association, as of the week ending January 15, only 2.7% of newly created mortgages were future-adjustable in volume, and 7.6% were also adjustable in value.

The second point is that interest rates are not likely to rise unless the economy is strengthened, which should mitigate high mortgage losses.

During the real estate bubble, mortgage guarantee operations became so risky that some lenders were accepting loans without proof of income or employment requirements. Now, says Goodman, mortgage collaterals are getting stricter and more stringent, and first-time buyers face the toughest time and conditions with lenders as the value of their purchases tends to be smaller. Goodman also added that banks find it more profitable to focus on refinancing existing buyers' loans.

Biden's decisions

Researchers in bubble theory say the market could collapse when foreclosure protections are over, arguing that 1 in 10 homeowners with mortgages has late payments, according to the US Department of Agriculture.

As one of the first decisions of the new president, US President Biden asked the federal agencies to extend the mortgage deduction programs until the end of March of this year. Assuming that Biden does not extend the forbearance program again after that, there is no reason to expect a wave of bank foreclosures for those who are in arrears in April. As Goodman says, most homeowners have raised capital from their homes, enabling them to sell them and pay off their mortgages in full. But that wasn't the case the last time when falling real estate prices surprised people with large mortgages and little or no capital.

Overall, Goodman says, she is very optimistic about the health of the US real estate market.

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