A real estate bubble is an economic bubble that periodically happens in a local or global real estate market, which usually follows a rapid increase in the valuations of property. These valuations usually increase until they reach an unsustainable level and then fall into a bubble. It can have disasters effects, just like the one that led to the financial crisis in 2007/2008. However, there has been much worry over whether or not we are running into another real estate bubble and if it can even be prevented.
The recent increase in student loan debt and the fall of junk bond prices has had analysts forming parallels to what happened in 2008. But if you take a better look at the numbers, you will notice that mortgage lenders aren’t really handing out loans like candy. Though lending standards have lowered, they still remain tighter than even before the 2007/2008 bubble and crash.
Along with this, advances in technology have made it easier for agents and lenders to improve the quality of their processes. Software has made collection of consumer data more efficient and big data too has allowed for a better look at consumer behavior. In turn, this has led to underwriting to become more robust.
However, according to the New York Post, we’re still prepping for what could be another bubble and potential crash. A 2016 article stated that the Federal Housing Administration was one to blame for falling credit scores. Many government housing agencies have actually lowered their credit requirements in order to help more minorities and immigrants with lower incomes and poorer credits qualify for homes.
The Office of the Comptroller of the Currency (federal agency that regulates the U.S. banks) recently reported that the declines in mortgage underwriting standards are very similar to the pre-crisis events of 2007/2008. It seems that more and more lenders are taking on more and more credit risk, which could lead to a major hazard. This lowering of credit requirements is leading to a large increase in home prices, even quicker than inflation and incomes. House flipping has also become another hit lately. For instance, last year, nearly 180,000 houses were sold and then resold. This is the highest it has been since 2007. High volumes of house-flipping usually indicate trouble for the housing market says chief economist of Windermere Real Estate Matthew Gardner.
The term “bubble” simply means… what goes up must come down and bubbles aren’t an exception. The housing bubble began in 1997 and finally burst and crashed 10 years later. Many analysts are saying that the current trend of a real estate bubble started in 2011 when housing values hit rock bottom. Since then, the real median home price has rebounded all the way back up and to a level that is just barely below the pre-crisis peak of 2007.
The current real estate bubble is being fed the same way the 2007 bubble was: artificial demand from government-induced lax lending standards. Along with this, accommodative interest rates set by the Federal Reserve also aren’t helping. Since 2012, housing prices have been raised nearly 16.5 percent. Are the financial reforms instituted by President Obama really helping to avoid the next crash? These reforms may not be regulating as well as we had all hoped, instead they aren’t limiting the volume of high debt-to-income loans. Wells Fargo Chief Economist John Silvia told the New York Post that we are seeing “the promotion of policy to push firms to seek riskier products to promote growth.”
Thankfully, the Federal Housing Finance Agency, Federal Housing Administration and the Department of Housing and Urban Development have begun a full-court press on lenders. Hopefully a decision will be made on transitioning to a new and better credit-scoring model that will benefit all and keep the “fairness” that Obama had hoped for with his financial reforms. If we really are in a real estate bubble, the biggest fear is that it will hit harder than the last, but hopefully lenders and agents alike are paying attention to real estate signals to avoid what could be another huge (if not bigger) crisis.