A New Housing Bubble?
As Mark Twain advised, “Buy land [because] they’re not making it anymore.” These days, however, with the housing market scorching, one might be inclined to disagree with Mr. Twain.
Real estate in Greenville, SC has followed a broader trend in housing, which gained more than 2.5 trillion in value nationally in 2020. This is the highest true price increase in the real estate market since 2005.
And, we all know what was happening in 2005. Dubious lending practices created a bubble in real estate that burst in 2008, precipitating the largest economic downturn since the Great Depression.
All those newly-constructed homes for sale that seemed to crop up overnight at the beginning of early-to-mid aughts remained unoccupied; millions of homeowners went into foreclosure; home prices plummeted.
The Dow Jones plummeted, too. Investment banks had been “securitizing” mortgages for years: slicing and dicing them into tranches of risk (that is, risk that borrowers would default on their mortgages) to pawn off as equities to adventuresome investors.
The larger investment banks held only the AAA-graded MBSs (mortgage-backed securities) on their ledgers. Or, so they thought.
As it turned out, when a house of cards collapses, not even the bottom row is spared. Defaults on subprime mortgages created a cascade of foreclosures among non-subprime mortgages. Housing prices dropped precipitously, and the global economy went into freefall. The MBSs graded AAA by Moody’s and Standard and Poor’s were not worth the proverbial paper they were written on.
Banks were bailed out; the Fed goosed the interest rate to 0%; Congress passed an $800 billion dollar stimulus. Even these measures, however, proved inadequate to stave off the Great Recession.
We’ll spare you the arcane nuances of the role the $1 quadrillion derivatives market played in all this, but suffice it to say, the global economic situation was dire circa 2008. All because of a bunch of bad mortgages.
Do we see this same problem in today’s housing market? Have lenders returned to the same bad practices that got us into such a mess in 2008? Are mortgage rates too low? Why are housing prices so high?
One explanation for the rise in housing prices in 2020 is straightforward: the demand for houses ran far ahead of supply.
The Covid Spike Theory
When the Covid-19 pandemic hit in March of 2020, those who had homes on the market took them off the market.
This, as it turns out, is Behavioral Economics 101: when faced with uncertainty, people do not want to make drastic changes. Rather, they hunker down and wait until a more fortuitous future appears on the horizon.
This poses a big macroeconomic problem: during an economic downturn or any crisis, you want (and need) individuals to resume normal economic activity. When George W. Bush urged people to “go shopping” in the aftermath of 9/11, for example, he was widely panned by his critics.
As a matter of fact—and, for the record, Wilson Associates is entirely nonpartisan; whether you like George W. Bush or not is your business—going shopping was the best thing American citizens could have done. (Should he have told everyday Americans to go fight terrorists?)
The reason that going shopping is a good idea during a crisis is because the only thing worse than a crisis is a crisis and a recession because of said crisis.
More suffering does not placate suffering.
Returning to Covid-19 as the possible reason for the spike in housing, we assert the following: the pandemic certainly caused a marginal rise in prices. That much seems undeniable. But it really only exacerbated an already existing trend.
Housing prices are on the rise, and will continue to rise in the foreseeable future for reasons that we will cover below.
Bust and Boom
The current housing supply shortage has its roots in the Great Recession. As Matthew Murphy, Executive Director of the Furman Center for Real Estate and Urban Policy at NYU, explains: “One of the most prominent issues in pre-pandemic America [italics ours] was supply shortages. That has carried over, but we already had evidence of supply shortages heading into the pandemic.”
Our housing situation in 2021 begins in 2008, as Murphy further elaborates: “The context to this current housing moment is that we were still recovering from the 2008-2009 foreclosure crisis.”
Of course, with supply chain snarls in lumber temporarily halting the construction of new homes, the pandemic has played a role, but only a minor one.
The real culprit goes back to the now 13-year-old financial crisis, which spawned an “underbuilding gap” of between 5.5 and 6.8 million housing units.
In a moment in which housing prices were falling off a cliff, construction companies stopped building houses. Now that we’re back in a bull market, people want to buy houses that were never constructed.
You have likely noticed this phenomenon as you drive around Greenville. We pass by new housing developments all the time. Construction companies simply can’t build them fast enough. 6 million houses is, to put it mildly, a lot of houses.
Wilson Associates’ position, therefore, is that the housing market is not overinflated, but rather undersupplied.
In short, if you’re looking to sell your home, it’s a great time to sell. Alternatively, if you are lucky enough to find your dream home, come in over the asking price. There’s no shortage of potential buyers.
When and if—BIG “if” here—the housing market goes bust again is anyone’s best guess. Remember that we had never seen a collapse in housing prices before 2008. Invariably, economists will continue to make their predictions, and they’ll continue to miss the mark.
Our two cents: buying a home is difficult, but not impossible. And there’s never a right time to buy or sell. Alternatively, what this means is that every time is the right time to buy and sell a house, irrespective of what we think houses “should” cost.
