There has been much debate lately over whether or not we are currently in a real estate bubble that’s ready to burst, or if this is just a peak phase that will experience a market correction. To truly understand if we are in a bubble, we need to look at what defines a market bubble, and how current conditions compare to past bubbles.
What exactly is a real estate bubble?
A bubble occurs when there is an excess of inventory on the housing market and a lack of buyers, or when there is a lack of inventory and an excess of buyers. When this happens, we see a sharp decline or increase (respectively) in the prices of the homes on market. A burst occurs when there is a sudden increase in inventory and demand stagnates. In 2008, there was a surplus of inventory that resulted in lenders giving out loans to people who were then unable to pay those loans back. Now, lending is much stricter. There is a large number of mortgage applications, but the more rigid requirements ensure prospective borrowers who get approved are considered fully capable of paying their monthly mortgage.
UBS Global has a map of the world’s largest cities and how at risk they are for being in a bubble. In North America, the only area really “at risk” is Toronto. Many other major cities are over-valued however, with Boston at “Fair Value” and Chicago at “Under-valued”. To do this, UBS examined the prices of homes and how they compared to area income and rents and other typical signs of a bubble.
And what about the foreclosure flood that is anticipated once the moratorium expires? Well, this article by The Philadelphia Inquirer makes a valid point that it’s not likely to be as bad as we fear. Foreclosures will rise but this is an anticipated event. Homeowners have much more home equity now than they did in the past, and government and lender aid can prepare to do a better job of keeping homeowners from foreclosure.
So, are we in a bubble that’s ready to burst?
It may very well depend on the location, but judging the situation by data like this, it seems fair to say we are in for a market correction and not a bursting. The number of mortgage applications has dropped recently (just check out this recent article by Banker & Tradesman) and there may be an ease in demand as we get closer to winter. However, there is continued interest in buying as people want to take advantage of the low mortgage rates.
Inventory remains low, but sellers are slowly becoming more comfortable with listing their homes as we all adjust to the “new normal” brought on by COVID-19. Foreclosures will rise as the moratorium expires but lenders have time to prepare, unlike in 2008 and 2009. There will certainly be some struggles but the real estate market (bar some further unforeseen circumstances) is stable despite being over-valued, and professionals have time to prepare for future issues. More inventory will hit the market but it’s likely to result in a correction of prices as inventory better meets demand, more so than a bubble burst of unwanted properties selling for significantly less than their value.
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