When will the housing bubble pop? | Real Estate market 2022

May 20, 2022

When will the housing bubble pop? | Real Estate Market 2022

A lot of people are saying that the current housing market circumstances look similar to the housing bubble that happened in 2007.

Today I want to give you some data that shows where the situation of the current housing market differs from the last housing crash. I also want to talk about what are the things that led to the 2007 housing crash, or as they say, “What made the housing bubble pop,” and why that won’t happen in the 2022 real estate market.

Let’s dive right in.

No signs of housing overbuilding and risky lending practices, concerns of a recession

Deseret News reports what Elon Musk says about the housing bubble.

He recently commented on a Tweet from Shibetoshi Nakamoto, a creator of a cryptocurrency, saying, Cryptocurrency was created as a statement against central bank control, right after the 2006 recession caused by predatory lending practices and other irresponsible nonsense, leading to the housing bubble bursting, rampant printing of money, bailouts, etc.”

Elon replies: “The axiomatic error was that housing prices only go up. I don’t support predatory lending, but many of those lenders were severely wounded or didn’t survive. They dug their own graves – a lesson we should all take to heart, including me.”

The Deseret article explains the 2006 debacle talked about in the Twitter exchange.

According to them, “At the time, the U.S. overbuilt housing while risky lending practices fueled an unsustainable rise in housing prices. Eventually, mortgage delinquencies, foreclosures, and devaluation of housing-related securities caught up to big banks, and the market collapsed.”

A lot of us lived through this. I was a real estate agent here in LA and I lived through this.

“The housing bubble popped after prices peaked in early 2006, then began declining in 2006 and 2007 before hitting lows in 2012,” Deseret continues.

Now, the media is catching up saying that real estate is heading towards a more normal market. However, fears about a recession have resurfaced, as have concerns about the 2007 housing bubble.

As Investopedia defined it, a recession is two successive quarters of negative GDP, so it is still too early to say at the moment. Like Elon Musk says, let’s take a look at what’s actually happening in a logical manner before we start freaking out.

Affordability concerns and the labor market

This article from CNBC shows us what Joe Zidle from Blackstone says about the issue.

The article is titled “Home affordability at 2007 bubble levels, but a crash is unlikely: Blackstone’s Joe Zidle,” and reports the concerns of housing affordability resembling what happened in 2006 before the housing crash of 2007 that Zidle discusses.

According to the article, “Blackstone’s Joe Zidle calls homes almost as unaffordable as the 2007 peak. Yet, he believes a crash is unlikely due to a major difference: Most owners aren’t using their homes like an ATM.”

And it is true. Wages are not keeping up, that’s why we have an affordability issue for real estate.

However, home equity acts as a buffer for homeowners right now. National home equity is $55,000 and, in some areas, it is even higher than that. I’m in California and the average home equity in this area is $95,000.

“Unlike the housing bust, Zidle adds home equity is at an all-time high and household balance sheets are strong. ‘You haven’t had overbuilding. You haven’t had a drop in credit or lending standards,’ he noted,” says the article.

This is important, too. One of the issues they faced in 2006 is overbuilding, and that is not what’s happening in the real estate market right now.

In fact, we have a severe lack of inventory, and Zillow even recently raised concerns that the builders might pull back if all the rumors of a housing crash get to them.

According to CNBC, Zidle says, “Because you have very little excess in housing, I think you end up having less risk.”

Because the demand is so high and there’s very little housing, the risk of over-supply making the market crash is very little.

“‘Historically, housing ends up being more highly correlated to labor markets than it is to mortgage rates,’ he said. ‘As long as the jobs market remains relatively healthy, I think housing will as well,’” CNBC continues to quote Zidle. And I found it interesting that real estate is tied more to the labor market than the mortgage rates.

Zidle also thinks inflation is going to remain here for a little longer because during the pandemic we had a multiple-trillion-dollar influx of funds in the US that made inflation rise. According to the article, “Zidle’s call reflects a 12-month time frame. Within that horizon, he sees the Federal Reserve hiking interest rates deeper into next year than the Street anticipates due to persistent inflation.”

“‘Ultimately, the Fed is going to have to hike interest rates until something breaks,’ added Zidle. ‘When we do get to a point where something breaks, I don’t think it’s housing,’” CNBC quotes.

The article closes with a statement from Zidle. “‘You might see home prices generally flatten out. You may have pockets of weakness where home prices in some regions might fall,’ Zidle said. ‘But the idea of having a national and a prolonged drop in housing as the economy eventually rolls over, I think is still a relatively low probability.’”

Real estate is regional

This is data from Redfin titled “Homebuyer Competition Falls for Second-Straight Month, Hitting Lowest Level in Over a Year.”

According to Redfin, “61% of home offers faced bidding wars in April—down from 63% a month earlier and 67% a year earlier—as surging mortgage rates prompted buyers to drop out. Riverside, CA and Atlanta saw the biggest annual declines.”

And we know that Riverside and Atlanta currently have overvalued housing markets at 30.76% and 55.96% respectively.

Real estate is regional, and the overvalued markets are the areas we need to watch out for as the overall housing market evens out.

Final Thoughts

We don't know what will actually happen, but based on the data we have, we can make some logical predictions. And from where I stand, it looks like the housing market is evening out instead of crashing.

I don’t know when that is, it could be around August or September this year, or it could take longer. Even with the interest rates at the high fives, maybe ending at the low sixes, it is still looking pretty smooth.

As long as nothing drastic and unexpected happens, the economy isn’t looking as bad as most people feared. The unemployment rate is pretty low, and the desire to own a home is pushing people to look for second jobs, keeping the labor market lively.

Concerns over foreclosures are far from what is actually happening, in fact, the past two years have shown the lowest number of foreclosures in the last five years.

 Let’s not spread false rumors out of emotions, especially if we haven’t taken the time to look at the facts that the data available to us shows.