Since the beginning of the pandemic, the housing market has seen a steady increase in demand. From the outside looking in, the market conditions somewhat look like those experienced in the early 2000s which served as a precursor to the 08’ recession. As one contemplates the current state of the economy especially the housing market, one can not help but wonder if we are indeed going back down the road that lead to the 08’ crash?
A key element of figuring out whether the current housing market is in a bubble reside in understanding the dynamics of the previous and current housing markets. Each market can be analyzed and compared to determine whether both market conditions are similar and that they also fit the definition of a bubble.
In a nonscientific context, the word bubble refers to a good or fortunate situation that is isolated from reality and is unlikely to last. In real estate however, it is a sustained temporary state of over-estimated prices and rampant speculation in housing markets. Taking one look at this definition, one could assume that the current market is in a bubble given that properties are currently being overvalued. But an in depth look at the root cause of the 08’ crash could give us a better understanding of the issue.
The recession of 2008 was originally caused by the sudden burst of the housing bubble. At its roots, the problem came about after people started taking out more loans than they could afford to invest in real estate. At the turn of the century and the few years that followed, market conditions were ideal to invest in real estate. Interest rates were favorable, properties were overpriced, return on investment was high and demand was high. All those favorable elements prompted lenders to start relaxing their standards and give out loans to risky customers. Eventually those customers unable to repay their loans defaulted causing the banks and private lenders to lose considerable chunks of money. In an attempt to recoup some of that money, most lenders bundles those faulty loans and resold them to other agencies knowing full well and failing to disclose the risk involved thus, causing a ripple that would lead to the second longest recession in American history.
The 2020 real estate market as of today looks quite similar to the one prior to the crash. However, unlike the previous, most of these conditions are not based on speculation, but on actual facts and trends. Interest rates are low because the feds are trying to give the economy a push after slowing down during the pandemic. Demand is rising because our homes became our offices so people are spending more time at home, also a quick look at the statistics shows that homeowners are staying longer in their houses (10 years) which is causing a shortage in supply and driving up property prices. Finally, even though lenders are relaxing some of their requirements, they are still managing risks and finding new ways to promote low risk lending practices.
Although there are some similarities in the market conditions, the key element of the previous crisis is missing. People are no longer borrowing above their means and lenders are not simply handing out loans anymore. To top it all, despite the fact that most conditions of a housing bubble are fulfilled, the speculation which represent an important factor in the creation of the bubble is absent, therefore leading us to conclude that the current market is not currently in a bubble.
Even though we have come to the conclusion that the market is not currently in a bubble, we lack the ability to see the future. We can only predict based on different factors what we believe will happen and how it will affect us. Some of those predictions mention a hard fall from the highest point in the upcoming months, while others predict a normalization of the current state of the market. Despite all these future predictions, one thing that is certain is that what goes up must come down. The question here is when it does will it destroy everything in its path?
Lusk, V. (2019, June 5). The Market Crash of 2008 Explained. Retrieved from Wealthsimple: https://www.wealthsimple.com/en-us/learn/2008-market-crash
Mohtashami, L. (2020, November 19). The Housing market is hot, but not in a bubble. Retrieved from HouseWire: https://www.housingwire.com/articles/the-housing-market-is-hot-but-not-in-a-bubble/