I hope this letter finds you well as we navigate this craziness. One of the things we are getting asked constantly is whether or not we are in a “bubble” in the real estate market currently. This is a question many experts are conflicted on as well. The purpose of this letter is to give you some insight into why I think we are NOT in a bubble and, as a homeowner, what that means for you.
Before we begin the discussion of if we are or aren’t, here is a bit of perspective.
- If you believe we are in a bubble, there are things you should be doing. One, consider cashing out of your home and sitting on the cash (or reinvesting in something other than real estate). When that bubble pops, you buy up the remains. The other option is to stay put but stretch your time frame–in other words, look at a 7-10 year plan. Every single correction we’ve ever had in this nation in real estate has risen back to previous levels in less than 5 years. So, if the market drops off tomorrow, selling in 3 years is going to yield less profit than selling now (potentially). So stretch your horizon to 5+ years after the crash to make sure you don’t lose.
- If you believe we are not in a bubble, here are the things you should be considering. If your game plan is to upgrade your home in the next 3-5 years, you should look at doing it sooner than later. Prices will continue to rise and, most likely, interest rates will too. These factors make affordability at its best right now. A year from now, the upgraded home may be significantly less affordable than it is right now.
A few factors affect this:
- lumber prices
- labor prices (availability)
- interest rates
- rate at which people are moving here.
All of these factors affect the price and availability of homes
Now, my opinion, we are not in a bubble and here are 6 reasons we know we aren’t:
- Price growth is the product of pure economics–less supply, more demand= higher prices–This was compounded by the pandemic. More people are working from home than ever before. This brings to light the issues with our homes and flooded the market with buyers. First time buyers, second time buyers, investors, first time investors (kept their existing homes) all entered the market.
- Sustainable lending practices–One of the main contributing factors to the crash in 2008 was extremely irresponsible lending practices. Very low credit scores, stated income, alternative forms of “credit”, subprime, interest only loans, 110% loans, etc were the norm. Now, requirements are as strict as they have ever been. It is actually not easy to get a loan. These practices stabilize the market and, should something happen, make a crash much less likely.
- Low Interest Rates–This is a HUGE driver for price increases. The “cheaper” the money is, the more we can afford to borrow. If we were at 8% rates, as a population, we just couldn’t afford the prices. At 3.5% or less, we can afford (monthly payment wise) a higher loan amount. In other words, money is cheap and we can afford more of it.
- Substantial equity–The amount of equity our population is sitting on is more than it has been in decades. We have less debt as a percentage of disposable income than we did in the early 80s. This equity protects us from the foreclosure positions many were in in 2008. If the market drops off, we can cover the loss. That only helps consumer confidence and keeps banks willing to lend.
- Slowing of new construction supply–home construction was facing a dilemma before the pandemic–labor was more and more scarce and more and more expensive. Covid-19 shut down borders that exacerbated the issue by making materials more scarce and skyrocketed prices of materials. As all this happened, builders had to protect themselves from exposure to a volatile market. Every builder reacted differently. Some went to pre-sales only. Some went to market homes only–not setting prices until the home was built. Some went to escalation clauses in their pre-sale contracts. Bottom line, all production slowed.
- Historically, new construction was the expansion valve to our market. If demand went up, builders built more (private, existing home sales stay pretty even). If the market slowed, builders built less. In this case, the market zoomed while builders HAD to slow down. The gap got crazy wide and it is unlikely builders will “catch up” anytime soon.
At least in our area, our existing market was actually behind. Right now we are at a 102 cost of living index. 100 is the national average. We (Nashville MSA which includes Rutherford County) only crossed the 100 mark less than 2 years ago. Note that the 102 is a composite and our housing piece of that is 113.3 right now (13.3% higher than national average). The point is, we have been a bargain for a LONG time and were due to go up quite a bit.