“So, what do you make of this housing bubble?” I am occasionally asked. I’m no economist, but as the old joke says, if two economists are asked a question, you’ll get at least five different opinions. Maybe one will match mine.
The shape of a bubble is always the same, but what creates the bubble can be wildly different. Such is the case with the current bubble versus the one leading to the housing crash of 2008.
Do bubbles always pop? That was certainly the case after the collapse of Lehman Brothers in 2008, the largest bankruptcy in America’s history. But sometimes a bubble can just deflate. That is my prediction for the current housing bubble.
Looking back, it is clear the bubble of 2008 was a consequence of many factors, the biggest being ridiculously easy credit underwriting rules for home purchase loans, which basically meant there weren’t any rules. I know because I got one of those loans.
In 2007, I obtained a “no doc” loan, meaning no proof of income was needed, just a credit score over 600. There was no down payment on the home, meaning no equity, and monthly payments were interest-only for 10 years. I bought a house for $50,000 below appraisal, so I thought I had instant equity. Plus, prices were still rising, so I assumed my equity was also rising.
Then came the crash of October 2008. Almost overnight, the value of the home dropped $150,000 less than what I paid the year before, meaning a $200,000 drop in the illusion of equity. The bubble holding me up definitely popped. I was underwater and sinking fast. I’d bought high and sold low. No Warren Buffett was I.
The other consequence of the 2008 bubble was the wild speculation that publicly traded builders were pushing in major metropolitan markets. With no credit required, they knew homes would sell. They pumped them out as fast as they could build them. When the crash occurred, they were stuck holding hundreds of thousands of unsold homes.
Remember the $8,000 first-time homebuyer’s tax credit of 2009? It was touted as a way to get young families into homes. Yeah, right. They could have just as easily bought a home with a no-doc loan in 2007. The real reason was to clear out inventory so publicly traded builders didn’t follow the bankruptcies of subprime mortgage lenders.
The tax credit saved their butts and cleared the inventory.
In small markets like Santa Fe, there was never any overbuilding and no unsold inventory except for couple dozen speculative luxury home in places like Las Campanas. In the affordable housing subdivision I was building, we started 22 speculative homes beginning at the end of 2007 and sold every one before the crash of 2008. We had zero unsold inventory. Supply had met demand.
Today’s inventory? What inventory? The housing bubble of 2021 is purely price-driven and for purely market reasons. There is no inventory. Santa Fe has a housing deficit measured in thousands, and such is also true for virtually every market in America.
Sure, regulatory factors, along with lumber and labor shortages, contribute to price inflation, but this bubble is a classic situation of not enough supply to meet demand.
Eventually, rising prices will decrease the pool of eligible buyers. Strong market demand will continue to stimulate supply. Credit rules might ease. National down payment assistance programs are contemplated.
A market equilibrium could be on the horizon. But it’s a far horizon. It’s unlikely we’ll hear a pop like the deafening bang of 2008. More likely, it’ll be a long, flatulent sound of air being let out of a big party balloon.