Talk of a housing bubble is beginning to crop up as home
prices have appreciated at a rapid pace this year. This is understandable since
the appreciation of residential real estate is well above historic annual
averages. According to the Federal Housing Finance Agency (FHFA), annual
appreciation since 1991 has averaged 3.8%. Here are the latest 2020
appreciation numbers from three reliable sources:
It’s easy to jump to the conclusion that house appreciation
is out of control in today’s market. However, we need to put these numbers into
Inflation and the Comeback from the Housing Crash
Following the housing crash, home values depreciated
dramatically from 2007-2011. Values are still recovering from that unusually
long period of falling prices. We must also realize that normal inflation has
had an impact.
Bill McBride, the founder of the well-respected Calculated
Risk blog, recently summed it up this way:
“It has been over fourteen years since the bubble peak.
In the Case-Shiller release today, the seasonally adjusted National Index, was
reported as being 22.2% above the previous bubble peak. However, in real terms
(adjusted for inflation), the National index is still about 2% below the bubble
peak…As an example, if a house price was $200,000 in January 2000, the price
would be close to $291,000 today adjusted for inflation.”
The COVID Impact on Home Prices
The pandemic caused many households to reconsider whether
their current home still fulfills their lifestyle. Many homeowners now want
larger yards that are both separate and private.
Their needs on the inside of the home have changed too.
People now want home offices, gyms, and living rooms well-suited for video
conferencing. Barbara Ballinger, a freelance writer and the author of several
books on real estate, recently wrote:
“While homeowners continue to want their outdoor spaces
that offer a safe retreat, that appeal has shifted into other parts of the
home, coupling comfort with function. In other words, homeowners want amenities
for work and leisure, and they plan to enjoy them long after the pandemic.”
At the same time, concerns about the pandemic have caused
many homeowners to put their plans to sell on hold. Realtor.com just released
their November Monthly Housing Market Trends Report. It explains:
“Nationally, the inventory of homes for sale decreased
39.2% over the past year in November…This amounted to 490,000 fewer homes for
sale compared to November of last year.”
More people buying and fewer people selling has caused home
prices to escalate. However, with a vaccine on the horizon, more homeowners
will be putting their houses on the market. This will better balance supply
with demand and slow down the rapid appreciation.
That’s why major organizations in the housing industry are
calling for much more moderate home appreciation next year. Here are the most
recent forecasts for 2021:
National Association of Realtors: 4.5%
Freddie Mac: 2.6%
Fannie Mae: 2.1%
Mortgage Bankers Association: 2%
This Is Nothing Like 2006
Finally, let’s put to rest some of the concerns that today’s
scenario is anything like what led up to the last housing crash. Lawrence Yun,
Chief Economist at the National Association of Realtors (NAR), explains why
this is nothing like 2006:
“Such a frenzy of activity, reminiscent of 2006, raises
questions about a bubble and the potential for a painful crash. The answer:
There’s no comparison. Back in 2006, dubious adjustable-rate mortgages taxed
many buyers’ budgets. Some loans didn’t even require income documentation.
Today, buyers are taking out 30-year fixed-rate mortgages. Fourteen years ago,
there were 3.8 million homes listed for sale, and home builders were putting up
about 2 million new units. Now, inventory is only about 1.5 million homes, and
home builders are underproducing relative to historical averages.”
Most aspects of life have been anything but normal in 2020.
That includes buying and selling real estate. High demand coupled with
restricted supply has caused home prices to appreciate above historic levels.
With the end of the health crisis in sight, we will see price appreciation
return to more normal levels next year.