Worried About The Bubble? Why 2021 is Not 2008 All Over Again
Updated: Nov 8, 2021
As the global COVID-19 pandemic exploded across the world, the world experienced a shutdown unlike anything this generation had seen. However, many individuals who remember the 2008 financial crisis began to see worrying signs that a similar situation was repeating itself.
Once the world took notice of the dangers that COVID-19 posed, global stock values plummeted as fear and anxiety gripped the globe. The sudden drop immediately had many individuals worried that a second great recession was imminent.
Fast-forward a year and a half, the world is starting to emerge from the pandemic with renewed hope. One area that has seen unexpected vigor has been the housing market.
In the Spring of 2021, house prices skyrocketed, thanks partly to the Federal Reserve slashing interest rates and pumping stimulus cash into the market. With few homes on the market, prices went through the roof, with many homes seeing bidding wars break out.
For sellers, this has been a significant period of opportunity. For buyers? Panic and anxiety as home prices rise faster than they can afford.
However, while the housing market has been on fire, many have begun to wonder - is this fast-growing economic season too good to be true? The short answer is no, and we are going to take a look at why you can trust that your home investments in 2021 are not going to lead to the same buyer's remorse as in previous decades.
A Reminder: The 2008 Housing Crash Explained
In the United States, the financial crisis of 2008 was precipitated by a housing market correction. The peak in house prices preceded the stock market crash and the recession by a few months.
Usually, there are two types of bubbles that occur in the real estate sector - asset bubbles and credit bubbles. An asset bubble encourages people to invest in real estate on the belief that land value will increase with time. A credit bubble encourages people to buy houses using loans from banks at high-interest rates.
In any case, when asset bubbles burst, there is a massive impact on the economy, although it does not affect all sectors or regions uniformly. Hence, countries and regions need to be prepared for such situations.
The 2008 Financial Crisis: When Credit Bubbles Burst
As an asset bubble starts deflating, investors begin to sell houses that they have bought with the expectation of making huge benefits. This leads to more homes being sold by banks who have made loans and cannot recover their loans. As a result, banks are forced to reduce their lending activity in the hope of restricting credit supply. With less money available for loans, people do not finance things like businesses and homes, so the economy slows down.
The Recipe for a Housing Crash
To understand if the 2008 housing crash has anything to teach us about our current reality, it's best to know the ingredients that go into a housing crash recipe:
1. Excessive Credit: When banks make too many loans to people because they believe that land prices will keep rising, this increases the supply of credit in the market. This, in turn, affects interest rates and makes it easy for people to borrow.
2. Easy Income Propositions: When governments create easy income opportunities like home refinancing schemes or subsidies, people become comfortable taking on more debt. They start buying houses and investing in real estate opportunities because interest rates and property prices seem attractive.
3. Cheap Money: When the Federal Reserve Bank sets low interest rates, it makes credit cheap for banks and other financial institutions. This encourages them to make loans without paying much attention to the creditworthiness of applicants.
4. A Home Run Economy: When the overall economy in the country starting to rush back to health, people feel secure about their income and use easy money to buy houses even if they do not have enough income or savings.
Once these ingredients are in place, it becomes challenging for authorities to deal with a housing crash.
Is 2021 a Recipe for Disaster?
In short, buyers and sellers should be relieved that the answer is no.
While no one would argue that the past few years have been hard for everyone, the sudden and shocking rise in home prices amid low interest rates should not give anyone cause for concern.
A Lack of True Speculation
It is worth noting that in the 2008 housing crash, there was a significant amount of speculation involved. This time, there hasn't been any substantial increase in prices of homes since 2007 apart from some isolated cases where areas have become popular in recent years.
The lack of speculation means that the city's real estate market is under control and ruled by market forces rather than speculation.
Another reason for the lack of speculation is that banks are wary of giving loans to people who do not have a steady income stream or enough savings. Since 2008, lenders and banks have come under increasing scrutiny to stop practices encouraging giving loans where they shouldn't.
While the COVID-19 pandemic did lead to a sudden halt in home sales overall - and a sudden rise in market value as the economy opened - the lack of speculation has ensured that prices have not risen dramatically.
The Housing Boom Wasn't That Explosive
Yes, you've probably seen the memes and comedic videos going around about people offering their first, second, and third children to secure a home contract. With competition and pricing being so wildly unexpected, many wonder if we are riding the top of a bubble that is about to burst.
Here are some realities to consider:
1. The Housing Market Isn't That Hot (All Things Considered)
Many think we are knee-deep in a potential housing bubble due to the fast-rising home prices and low interest rates. While it's true that these two realities have paved the way for a hot housing market, we don’t see the same behind-the-scenes realities that led to the post-2008 crash.
In fact, home sales since the sudden market downturn in March of 2020 may seem explosive, but when taken historically, they are potentially flat compared to previous years. Sales prices are high, but this may be due to various positive factors related to homebuyer finances rather than recession warning signs.
2. High-Risk Loans Aren't In the Picture
If you think back to the market crash, there were a lot of high-risk loans being given out. This was one of the key reasons why prices fell quickly and how difficult it was for people to sell their homes at a profit.
However, in the wake of irresponsible loan behavior, the federal government stepped in and put a stop to most high-risk "opportunities." A lack of subprime lending means that there is less incentive for homeowners to default or try to flip their homes in an effort to make money and then get out.
3. The Housing Market Is Still Riding on the Sheer Power of Buyers and Sellers
Another reason that people are concerned about a potential housing bubble is that they feel as if they're being taken advantage of. In some cases, buyers may be feeling pressured to buy more house than they need or can afford.
However, while prices may be high by some standards, homebuyers are still more likely to spend less than they can comfortably afford. Most will rely on healthy savings or a decent amount of wealth before putting themselves in a position where they have to stretch to buy the right house for themselves.
In short, there is enough consistency between what buyers can afford and what they are spending that there is no major cause for concern about the long-term ability of many buyers to handle their mortgages.
4. No Need to Cry "Recession"
As the market tanked following the global shutdowns in March and April 2020, many began to forecast that the US would be falling into a recession - if not a full depression.
However, since those early dark days of the pandemic, the economy has taken a fast rebound (with hiccups here and there) to boost confidence. Jobs are being added monthly, and unemployment is continuing to come down from mid-pandemic highs. In many ways, the pandemic has led the economy to become more robust as companies are finding new ways to cut costs and be innovative.
5. The Feds Are Watching You (Even More So Than Before)
Thanks to the post-2008 crash aftermath and bailouts, federal regulation has been growing steadily. The reality is that the government has been keeping an eye on housing before the 1990s to prevent another crash. That's a significant reason why companies took more responsibility for their actions and practices before the 2008 crash - they were being watched.
As we move into the 2020s, that means less risky lending and homebuyers who are more responsible, which means less need for government regulation. Isn't that great news? That could lead to potentially fewer regulations in the housing market going forward as companies are doing their very best to create and provide home loans responsibly.
It's important not to fall into the same trap we fell into during the 2008 crash because that would be a huge mistake. Instead, we should be monitoring mortgage brokers’ responsible lending practices and actions to ensure they are not turning a profit on risky home loans.
Stay Calm and Trust the Market
History has shown us that the best way to avoid another bubble is to simply keep an eye on what's going on so you can spot any pitfalls in the market before they become a problem for you. With that in mind, if there's one thing to remember, it's this: In the words of John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."
Hopefully, these five points will help put your concerns about another housing bubble into better perspective so you understand where we stand today and why you should not feel threatened by another housing bubble in the future.
If you are considering purchasing a home, now is the time to work with experienced real estate and lending professionals who can walk you through the process step-by-step.
At Simple Home Loans, our team of financial experts is here to shine a light in the darkness that often comes with buying, investing, and wealth planning. Using various tools and strategies, we are committed to helping clients unlock the mystery behind their finances so they can better manage them.
We understand that financial stress is often at its peak when you're buying a house. We're here to make your experience simpler, easier, and much less stressful!
To learn more and set up a consultation, contact the Simple Home Loans team today.