Two questions continue to be asked of me. The first is, should I worry about rising prices and wait for the market to slow? The second is, is there a risk of a housing bubble like the Great Recession of 2008? The answer to both questions is, no! Housing prices are not on a verge of weakening and the housing economy of today does not compare in, any way, to the 2008 recession.
Let’s start with the basics. Home price appreciation is strong across the country. And yes, it is too strong. As Core Logic reported recently, home prices for May of this year were 15.4% higher than May of last year. In fact, there is no state in the nation that showed a decline in prices.
As the chart reflects the year over year (yoy) growth in the Washington DC region was no exception. Keep in mind that these home sales were happening during a global pandemic and a still wounded recovery of this economy. It’s a remarkable bright spot for this nation.
And while this appreciation rate is not sustainable, and certainly outpacing wage increases in an unhealthy way, economists expect home prices to continue rising. Frank Nothaft, the renowned Chief Economist, forecasts that the next few years will show a steady appreciation rate in the low to mid-single digits, reflecting a stable and healthy housing market. What this means is that, while some may have missed the surge of home price appreciation (hpi), home prices will continue to rise making real estate a stable and strong investment. The impact of millennials reaching their peak first time homebuying years of age 33-34 will result in consistent and ever increasing demand for housing units for many years ahead.
This leads to the second question, and the answer is no, we are not near any sort of housing bubble like we saw in 2008. Let’s remember, 2008 was a housing collapse built on the fact that far too many people were given the chance to buy a home with no documentation, adjustable rate, negative amortization, loans, including sub prime, often with no downpayment required. Unsustainable credit on top of a dearth of young people buying as millennials were still too young and Generation X was too small resulted in losses in owner occupied homes for several years. The 2008 recession was based on bad credit with poor demographics producing reduced demand. It was a house of cards, and in no way compares to today.
Today we live in a world that is obligated to the laws set by the Dodd Frank act of 2010. All of the adverse loan types were eliminated by law, making lending safer than ever in our lifetime. In addition, the law requires that lenders prove a borrower’s “ability to repay”. The law put an end to the no doc, reckless lending, that caused so much fraud and resulted in the foreclosure crisis.
The other variable is housing demand. Mark Zandi, the Chief Economist of Moody’s Analytics, concluded in this graphic that there is “pent up demand for housing as millennials enter their 30’s”. In looking at all Americans by age cohort, you can see a much larger wave of millennials charging forward to their early 30’s where the peak year for first-time homeownership happens. The chart is key as it shows that, unlike 13 years ago when the Great Recession hit, we will have year after year of increasing demand for housing units for many years ahead.
So, not only are we safe from any of the symptoms that led to the recessionary outcome of 2008. This nation will have the strongest demand for new single-family homes and condos unlike anything this nation has seen since the smaller baby boom generation began buying homes in the 1980’s.
The bottom line? We are in the early years of a housing boom that will only increase with year after year of ever increasing volumes of young buyers looking to purchase their first home. And while appreciation rates will slow to more normalized levels, sellers will continue to get great offers and buyers will come in at near historically low interest rates with steady home price appreciation ahead. Data matters and it clearly shows that there should be no second guessing what demographics and safe credit on mortgage products is giving this nation; an opportunity to get into a home in one of the most unique periods of opportunity in our nations history.
David H Stevens, CMB is the CEO of Mountain Lake Consulting, Inc and an advisor to George Mason Mortgage. David was the CEO of the Mortgage Bankers Association in Washington DC and served as the US Assistant Secretary of Housing and Federal Housing Commissioner for President Obama.