The housing market in the United States is a hot topic. I have seen videos of people waiting in line for an open house. My relatives went through the home-buying process and lost out on homes despite offering tens of thousands over the asking price.
Is this a housing bubble and when will it pop? It is difficult to answer because nobody knows for sure. You can look at the data and history of the housing market to get a sense of how things will play out in the future.
The housing market feels like it is in a bubble, and maybe it is. It is fair to wonder how long most families will stay in the market for a home if housing prices continue to go up. There are some reasons why the bubble burst may not be as violent as you think.
The image is from the same source.
The housing crash that began in 2007 is considered to be the most violent in U.S. history. There are some important differences between what happened in 2007, and what is happening now.
The pump wasprimed by systemic problems in the lending industry. Banks approved people for mortgages who couldn't afford them because of looser lending regulations. In the early 2000s, the percentage of subprime mortgages was in the single digits, but in 2004 and 2006 it jumped to 20%.
The spike in foreclosures was the result of many borrowers not being able to pay their bills.
The government tightened regulations after the financial crisis, making it harder to get a mortgage. The Dodd-Frank Act was created to prevent bad lending practices from recurring. The conclusion? I don't know if the housing market will crash without a shock to the banking system like in 2007, when people began rapidly default on their mortgages.
Real estate has been very resilient, with median home prices declining in just eight of the past 60 years. You can see below that from the peak of prices leading up to the crash to a roughly 30% decline in prices at the market bottom.
YCharts has data on the U.S. Existing Home Average Sales Price.
It took years for home prices to fall, and that was the most violent crash in history.
Could the recession cause prices to go down? The median home prices decline almost every year during a recession. Mortgage rates are rising, which makes financing homes more expensive, and could help cool demand from buyers. The rates are still near multi-decade lows, but have risen quickly this year.
Demand for housing needs to fall in order for prices to fall. Nobody knows when a recession or rising rates will have an effect.
Home builders shut down after the housing crash because demand dropped so quickly. The recovery of housing starts took years after the crisis, and it is estimated that America is short 5 million single-family homes.
US housing starts by YCharts
When supply and demand meet in harmony, home prices will likely peak. It is hard to make that case until I stop seeing people trying to squeeze into an open house showing. The sellers can no longer turn away buyers who are willing to pay thousands over the asking price.
There is a chance that a recession will happen, and that mortgage rates will keep rising, like buckets of water trying to calm the raging fire of home prices in the U.S.
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