This is a question that we get asked by clients, friends, and family on the daily. While nobody can know for certain, most experts agree that we’ll likely see a price correction, and not a crash. The best thing we can do is try our best to analyze the data which can be a key indicator of what’s to come.
Is it a bubble?
While it’s easy to draw a few similarities or parallels of today’s market to the housing market of 2008, there are many distinct differences which have experts believing that there will not be a “bubble.” To further understand this, first we must dive into some of the most prevalent driving factors behind the 2008 Housing crash – subprime mortgages, predatory lending, poor regulations, and foolishly easy credit. Lenders and banks were approving loans and home buyers that shouldn’t have been approved at higher than normal interest rates. When these poorly approved loan holders could no longer pay for the mortgages that they shouldn’t have qualified for, homes went into foreclosure in masses. Today, tighter regulations and scrutiny are in place which prevents this from happening again.
Supply and Demand
So if it’s not a bubble then why are housing prices going crazy?
Basic supply and demand. The shortage of supply and inventory of homes for sale is the primary reason for this hot seller’s market. Even prior to the COVID-19 pandemic, there was already a shortage of new homes being built relative to the growth of new families and households. According to CNBC, “The U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time.”
Various other factors such as “aging in place” where people are choosing to stay in their homes rather than sell and move into nursing or senior communities further exacerbated the supply shortage.
Then when the pandemic hit, it sealed the nail in the coffin that is the major gap between supply and demand. The pandemic made it even harder and more expensive to get materials for new construction. Meanwhile, interest rates hit record lows in efforts to prevent and combat a pandemic fueled recession which further increased buyers and demand for homes. At the same time, the pandemic resulted in more work from home and in general more time at home, causing many people to re-evaluate and want to upgrade their home life and perhaps upgrade or make their first time home purchase.
Ultimately, the low inventory and high demand for homes caused home prices to grow in an unprecedented manner.
What’s to come?
As mortgage interest rates climb to all-time highs, buyer demand and competition does seem to be easing. Combined with the high home prices, high cost of lending now has deterred some buyers from the market and demand has slightly eased off. However, inventory and supply still remains low.
Montgomery County Key Metrics Q1-2022
- Median Sales Price: $510,000
- Average Sales Price: $634,575
- Homes for Sale: 701 (down 51.5% from 1 year ago)
- Closed sales: 2,598
(Source: “Industry Watch Q1-2022”, brightMLS)
So what do we do?
Trying to predict the market can sometimes be fruitful, and most other times can be an exercise in futility as the volatility and unforeseeable factors come from left field to disrupt what you think you know.
But the most important thing to remember is that the real estate market, like almost any other market, is cyclical and in the long-term, real estate will always continue to grow in value.