Will the Housing Bubble Burst?

By Gary Tasman

Real estate is hot once again, with housing prices skyrocketing across the nation. Redfin reports that median home sale prices across the nation are 17% higher than they were just one year ago. Southwest Florida once again has one of the hottest real estate markets in the nation. In 2020, sales of existing homes increased by 27% in Collier County and 14% in Lee County.

Ordinarily, that news would be reason for celebration. However, many homeowners in our region are feeling déjà vu and worry that current conditions represent a housing bubble like we saw in 2007. Southwest Florida was the epicenter of the subsequent housing crash and foreclosure crisis, both of which led to the Great Recession. One out of every ten Lee County homeowners faced foreclosure between 2008 and 2013. Many of those who lost their homes, jobs, and savings are now wondering if the current housing market is in another bubble that will burst in the same dreadful way.

While current conditions certainly seem reminiscent of the housing boom before the Great Recession, the news is actually much less dramatic. Most economic experts agree that a market correction will come, but it will be nothing like the severe housing market crash we experienced in the aughts.

That’s because the conditions that created the last housing bubble are very different from the drivers that created the current housing situation. The 2007 bubble was caused by a number of factors, including a largely unregulated lending environment. Mortgage lenders were offering subprime loans to homebuyers at well above the home’s value. Banks were extending credit and zero-money down loans to buyers with little ability to repay. Cash-strapped buyers were choosing adjustable-rate mortgages, gambling that they’d be able to sell their homes before interest rates ballooned.

Since then, the Dodd–Frank Wall Street Reform and Consumer Protection Act has overhauled financial regulation. Though portions of Dodd-Frank have been amended or repealed since 2010, it continues to regulate many sectors of the financial industry in the hopes of avoiding another financial disaster.

The current housing boom has been fueled by more familiar economic factors, primarily supply and demand. The days of seeing dozens of “for sale” signs on every residential street are long gone. In fact, today we’re facing a housing shortage.

For the past five years, homebuilders in the U.S. have constructed just 1 million homes a month.

By comparison, in 2006 we were building up to two million homes per month. That trend came to a grinding halt during the Great Recession and never returned to pre-recession levels, creating a shortage of new homes. And unlike during the housing crisis, people who lost their jobs during the pandemic have been able to keep their homes thanks to generous mortgage forbearance programs, meaning fewer re-sales are on the market.

At the same time, demand for housing has remained high. Near-historic lows in interest rates mean that buyers can borrow more home for their money. A record number of buyers are now purchasing second homes. Adding to the demand, Millennials, the largest generation in the country, have more buying power than ever. With the majority of Millennials now in their 30s, they are ready and able to purchase.

While it’s easy to look at the current real estate boom and think history is about to repeat itself, the 2021 boom is the result of sound economic fundamentals. The market has responded to historically high demand and a low inventory of available homes. Yes, there will likely still be a market correction, either because of rising interest rates, rising housing inventory, or rising prices that are out of the reach of middle-class homebuyers, but a housing bust like we saw nearly fifteen years ago is highly unlikely. A downturn will be more likely the result of rising inflation or stagflation than because of speculative investment.

Southwest Florida’s popularity in the housing market and population explosion have also made a significant impact in the commercial property market. Our area’s population boom has led to a high demand for infrastructure, medical services, retailers, dining establishments, and more. To learn how you can take advantage of the demand created by our current market, contact the commercial property experts at Cushman & Wakefield | Commercial Property Southwest Florida.

Whether it’s time for you to sell, or you’re just considering your options in our current commercial real estate market, the commercial property experts at Cushman & Wakefield | Commercial Property Southwest Florida have the knowledge, data, and resources to determine the best strategy for you. Contact us by calling 239-489-3600 or contact-us.

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