According to a recent survey conducted by Redfin, 77% of buyers and sellers nationwide think that we are in a housing bubble.
In other words, they believe rapidly increasing home prices are an unsustainable growth bubble that will eventually burst as soon as demand no longer supports higher home prices.
When most people hear the term “housing bubble,” they immediately think back to 2008 when the last housing bubble burst and subsequently caused the housing crisis where home prices dropped by 20% or more in some places along with a fourfold increase in the number of foreclosures.
So it’s only natural that the thought of a housing bubble might create a little bit of panic among consumers.
But are these two situations comparable? Is the housing situation today in 2022 comparable to the housing situation from 2008?
My opinion: No.
To make my case, here are 3 reasons why I do not think we are in a housing bubble in Greater Houston in 2022:
- Inventory is, and has been, Extremely Low
- Lending Practices are, and have been, Extremely Tight
- Foreclosures are, and have been, Extremely Rare
Inventory is, and has been, Extremely Low
We have been in a seller’s market in Greater Houston for almost a decade. As I explained in this blog post, a seller’s market is determined by the number of months of inventory. A seller’s market is when we have 0-4 months of inventory.
As of the time of this writing (4/5/22), Greater Houston has 1.1 months of inventory. That’s down from 1.6 months just two months ago (when I wrote about it here).
Not only are we in a seller’s market, but we are in a hot sellers market and moving even further away from a balanced market (5-8 months of inventory).
Inevitably, some buyers will end up choosing not to buy right now. But even a large swath of buyers choosing not to buy in Greater Houston might bump the inventory from 1.1 to maybe 3 or 4… which, in both cases, would still be a seller’s market.
Inventory does not change overnight from 1.1 to 3 or 4 or 5, in the same way that inventory didn’t arrive at 1.1 overnight from 3 or 4 or 5. This has been at least 10 years in the making. Demand that has been growing over 10 years does not just disappear overnight.
And even when we someday move back to a balanced market, it doesn’t automatically mean the bubble will burst. It means prices will stop increasing as dramatically as they are right now to the point where they plateau until we move into the next buyer’s market.
But today’s high might still be lower than tomorrow’s low. That’s how the economic cycle works.
As long as we remain in a seller’s market, the bubble isn’t going to burst. By definition, it can’t.
Lending Practices are, and have been, Extremely Tight
In addition to extremely low inventory, lending practices have tightened significantly since 2008. That means that the buyers in the market today are legitimate.
If you don’t know the history of the 2008 housing crisis, it was caused by fraudulent lending practices (aka subprime lending).
Two major things happened to create the perfect (or not-so-perfect) storm:
1) Loan originators approved people to buy houses that they could not afford. These were called NINJA loans (no income, no job, no assets). If you could fog a mirror, you could buy a house.
2) Loan originators packaged these loans as “good” loans to unsuspecting investor note buyers who had no choice but to foreclose en masse when these supposedly “good” buyers stopped paying on houses they could never afford in the first place.
Think about it this way: If money were limitless, couldn’t you just continue to outbid someone until you got the house you wanted? That’s what happened in 2007 and 2008.
Home prices didn’t increase simply because there were qualified buyers, including cash buyers, outbidding one another (what’s happening today).
Home prices increased in 2007 and 2008 because people were getting approved for way more than they could afford and would offer to pay whatever they had to in order to get the house they wanted.
It was fraud on a grand scale and these loan originators fooled both consumers and investors alike.
However, due to both legislation and lending company policy changes, lending practices have tightened dramatically. Loan underwriters are extremely thorough today. They comb through everything, almost looking for a reason to NOT lend to you!
Anyone who’s bought a house in the last 10 years has experienced this thorough procedure, myself included! As long as these practices stay in place, it’s hard to see this type of fraud occurring on such a large scale ever again.
Foreclosures are, and have been, Extremely Rare
Furthermore, foreclosures have become increasingly rare.
Do you remember hearing about that wave of foreclosures that was supposed to happen when the CDC foreclosure moratorium ended last Fall (2021)?
Well, it never happened. Why?
Partly due to tighter lending practices, but also due largely to the fact that home equity has continued to increase as homes continue to appreciate in value. People in financial trouble are less willing to just walk away from their homes and leave behind their equity. They can simply sell (and actually make money) instead of getting foreclosed.
In contrast, the reason why foreclosures were at an all time high from 2008-2011 is because those borrowers who were the last ones to buy before the bubble burst owed more than their house was worth after it burst. Even borrowers with the best of intentions felt as if there was no incentive for them to keep paying if they had negative equity and could not afford to do so. And many of them let their houses go.
But with foreclosures at an all time low, this is not the case today.
In Conclusion
It is my opinion that the combination of low inventory, tighter lending practices, and rare foreclosures are all good indicators that we are not facing a housing bubble in Greater Houston.
So what does that mean?
Well, for starters, it means that increasing home values are for real and they are likely going to continue rising, at least until demand starts to dip.
When will demand start to dip?
Frankly, probably not anytime soon here in Greater Houston. Houston is projected to surpass Chicago as the 3rd most populated city in America by 2025. We live in an area that’s continuing to grow and new home construction is not keeping up with the pace. Texas is the world’s 10th largest economy and continues to attract businesses moving from other states (I am looking at you, California). And people are moving here with them.
What about rising interest rates? Won’t that keep people from buying?
Maybe some. But others will decide to take advantage now before both home prices and rates increase even further.
If you would have asked me a year ago what the market would do in 2021, I would not have predicted what we saw last year. But now that it has been a year without any signs of slowing down, I hate to say it, but I think it’s only going to continue.
Finally, if you’re thinking about buying, the best advice that I can give you is that the sooner you buy, the faster you’ll start building equity. I promise you that I do not simply say that as part of a sleazy sales tactic to try to get you to buy ASAP and put more money in my own pocket.
Rather, this is my honest assessment of the market that we are in and I simply want to inform you so that you can feel empowered to make the best decision for you and your family.
If and/or when you decide to purchase a home is your decision on your timeline and I am never going to twist anyone’s arm into doing something they do not want to do.
But if and when the time comes, whether that’s tomorrow or 2 years from now, I am here to help! You can schedule an appointment for us to discuss your home buying (or selling) plans by clicking here whenever you’re ready!
