Does… Inflation + Interest Rates = A Bursting Bubble?
Pat Kilner
77% of homeowners feel that we are in a housing bubble, according to a recent survey. Many folks relay to me with dread their experience in 2008 when the last bubble burst, and how they don’t want to make “the same mistake again.” The trouble with feelings is that they are not always based on facts.
Here are 2 facts to put you more at ease about what’s different about the market today as well as 2 factors to watch as this historically unprecedented market evolves:
Unlike the years leading up to 2008, demand is not being artificially created by unethical mortgage practices. It’s entirely real, with folks (mostly Millennials) purchasing who are very well cured. A lender’s A+ dream client. This means that the artifice that caused the collapse of the market (manifested in foreclosures) is simply not a factor today.
The supply of homes is abysmal: the lowest we’ve seen in over 25 years. And new housing starts from builders can’t bridge this gap in supply any time soon. In the crisis leading up to 2008, we had zero supply issues, just artificial demand. The crash of ‘08 is still being felt however as we never replaced all of the builders we lost as a result of the crisis. Builders are the only folks who create supply from raw land.
What to watch out for:
While rates are climbing (as of this morning, they are hovering right around 5.1% for a 30-year note) they are climbing for the strongest homebuying cohort I’ve seen in nearly 20 years in the business. These buyers have better savings, stronger employment, and family help that would make their grandparents green with envy.
To our minds, inflation is the biggest “x-factor” variable to watch. What will the increasing cost of goods do to the family budget? What will the average family cut back on? What sector of the housing market will it affect most severely? When looking for housing recession indicators in the past, we’ve often found that luxury housing stock and condos are the first to get pinched. So far, these markets remain strong in our fair city for now.
The bottom line:
With the discrepancy between supply and demand unlike anything we’ve seen in generations, even if inflation and rates cut demand by over 50%, we will still be in a strong seller’s market. Just not an insane one (which we can all admit would be a bit of a relief).
As a buyer, if you are buying for the long-term (which we insist is the only way to go in real estate) as others fret about jumping in, now is the time to get your down payment ready. Demand will decrease. Home values will continue to stay strong or increase and 5-6% rates are far from usury.
