Housing Boom or Bubble? Let's delve in!

Six months ago, home prices were setting record highs; listings got multiple offers above asking, and seemingly no one worried too much about the physical condition of the house. It was buy or bust, and a near buying panic fueled some crazy business. Then the Federal Reserve stepped in, raising interest rates and thus the cost of borrowing for everything to curb demand and slow the inflation that resulted from too many buyers chasing too little inventory. It worked. Demand is more in line with supply, and prices have actually fallen a bit, giving back roughly half of the gains from the first part of 2022.

Is this a repeat of the Great Recession, when housing virtually shut down, and prices tumbled? Things really are different this time, and the crash of the Great Recession is not likely to be repeated now. Then easy money (low rates and a big supply of money to lend) fueled a boom that fed on itself, and lax lending regulations encouraged a variety of transactions that should never have taken place. So-called "Liar Loans" and "Windshield appraisals" justified lending to buyers that were not qualified for the loan getting approved and properties being valued well above the real value. When some of the fraud became apparent, lenders froze to review what they had on their books, and with almost no lending available, deals fell through, and prices tumbled. This forced many to try to sell to get out of these deals before it became too late, but in most cases, it was. Millions defaulted on loans they never really planned on carrying long, just long enough to sell at a profit. With buyers unwilling and unable to get money, a panic set in. Eventually, the Federal Reserve reduced interest rates and pumped excess liquidity into the market, along with tighter lending criteria restoring confidence in the home-buying marketplace.

This cycle is quite different. The market was strong as household formations were strong, the economy was rolling along nicely. Then Covid hit, many were ill, and millions died. In a desperate effort to stop the spread, businesses were shut down, people were quarantined, and whole industries were shuttered worldwide to prevent contagion. This created disruptions throughout the supply chain, which had been finely tuned to operate "just in time" to deliver components just as they were needed. Shutdowns exposed the weakness of this efficiency strategy. As vaccines were adapted and stringent protocols relaxed, businesses resumed, albeit at an uneven pace reflecting local conditions. To the extreme, China is just now back to fully working, and as the source of so many manufactured goods, the supply stream was severely disrupted. The shortage of goods, combined with over a year of people not consuming, led to extraordinary demand in the face of small supply. Consider how many items are used in producing a house. It doesn't take much to interrupt the completion of these complex buildings. Overlay this with the Covid-induced "work from home" solution, making the home a 24-hour center for life, not just evenings, nights, and weekends. People improved the houses and wanted more space. Renters became buyers with short supply everywhere! Covid cratered the economy, and the Federal Reserve was charged with re-igniting the economy. It did this buy again, making money easy to obtain, and reduced interest rates to record lows. Home buying was off to the races! Prices increased nearly 20% per year, way higher than the 2-4% typically seen. After getting back to silly valuations from more demand than supply, the Federal Reserve was charged with reducing inflation, again by raising interest rates to cut demand. With supply chains normalizing, cost price inflation eased. With reduced demand and increasing supply, balance was again in the market. Excesses led to failures, and behavior is returning to normal.

Projecting into the new year, look for prices to remain within a narrow band, driven more by demand and supply issues specific to locations. There is no need for continued punishingly high-interest rates, which will be slowly lowered after mid-year. Funds are readily available for lending, no significant fraud has instilled fear among lenders this time. Like turning around an aircraft carrier, it takes time. It will now as well.

Don't expect 3% mortgages any time soon. Once-in-a-lifetime lows are seldom repeated, and much time and opportunity will be lost waiting for their return.