3 Reasons We Are Not in a Housing Bubble
🎈🌵Housing supply is extremely limited
In real estate, supply and demand is measured in “months’ supply of inventory”, which is based on the number of current homes for sale compared to the number of buyers in the market. The normal months’ supply of inventory for the market is about 6 months. Anything above that defines a buyers’ market, indicating prices will soften. Anything below that defines a sellers’ market in which prices normally appreciate.
Between 2006-2008, the months’ supply of inventory increased from just over 5 months to 11 months. Months’ inventory has been under 5 months for the last 3 years and currently stands at 1.9 months – a historic low. Remember, if supply is low and demand is high, prices naturally increase.
🎈🌵Housing demand is real
During the housing boom in the mid-2000s, people got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate. In the current real estate market, demand is real, not fabricated. The desire to own, coupled with historically low mortgage rates, makes purchasing a home today a strong, sound financial decision. If supply is low and demand is high, prices naturally increase.
🎈🌵Households have plenty of equity
During the housing boom, homeowners started using their homes like ATM machines. As prices began to drop, some homeowners found themselves in a negative equity situation where the mortgage was higher than the value of their home. Many defaulted on their payments, which led to an avalanche of foreclosures. Today, banks and homeowners have shown they learned a lesson from the housing crisis a little over a decade ago. Cash-out refinance volume over the last 3 years was less than 1/3 of what it was compared to the 3 years leading up to the crash.