“So, what do you think of this real estate bubble? I am sometimes asked. I’m no economist, but as the old joke goes, if you ask two economists a question, you’ll get at least five different opinions. Maybe one will match mine.
The shape of a bubble is always the same, but what creates the bubble can be very different. Such is the case of the current bubble compared to the one that led to the real estate crash of 2008.
Do bubbles always burst? This was certainly the case after the collapse of Lehman Brothers in 2008, the biggest bankruptcy in American history. But sometimes a bubble can simply deflate. This is my prediction for the current housing bubble.
Looking back, it’s clear that the 2008 bubble was the result of many factors, the most important being ridiculously easy credit underwriting rules for home purchase loans, which essentially meant that it there were no rules. I know because I got one of those loans.
In 2007, I got a “no doc” loan, which meant no proof of income was needed, just a credit score over 600. There was no down payment on the house, meaning there was no net worth, and the monthly payments were just interest for 10 years. . I bought a house for $50,000 below appraisal, so I thought I had instant equity. Also, prices kept going up, so I assumed my equity was going up as well.
Then came the crash of October 2008. Almost overnight the value of the house dropped $150,000 less than what I had paid the previous year, which meant a drop of $200,000 from the illusion of net worth. The bubble that held me back has definitely burst. I was underwater and sinking fast. I had bought high and sold low. I was not Warren Buffett.
The other consequence of the 2008 bubble was the wild speculation that listed builders were pushing in major metropolitan markets. With no credit required, they knew the homes would sell. They pumped them out as fast as they could build them. When the accident happened, they were stuck with hundreds of thousands of unsold homes.
Remember the $8,000 first home buyer’s tax credit in 2009? It was presented as a way to bring young families into homes. Yes indeed. They could have just as easily bought a house with a no-doc loan in 2007. The real reason was to clear inventory so that publicly traded builders wouldn’t follow subprime mortgage lender bankruptcies.
The tax credit saved their butts and liquidated the inventory.
In smaller markets like Santa Fe, there has never been overbuilding and no unsold inventory, except for a few dozen speculative luxury homes in places like Las Campanas. In the affordable housing development I was building, we launched 22 speculative homes starting in late 2007 and sold them all before the crash of 2008. We had no unsold inventory. Supply had met demand.
Today’s inventory? What inventory? The 2021 housing bubble is purely price driven and for purely market reasons. There is no inventory. Santa Fe has a housing deficit measured in the thousands, and this is also true for virtually all US markets.
Of course, regulatory factors, as well as wood and labor shortages, contribute to price inflation, but this bubble is a classic situation of insufficient supply to meet demand.
Eventually, rising prices will reduce the pool of eligible buyers. Strong market demand will continue to drive supply. Credit rules could ease. National down payment assistance programs are being considered.
A market equilibrium could be on the horizon. But it is a distant horizon. We’re unlikely to hear a pop like the deafening bang of 2008. More likely, it’ll be a long flatulent sound of air escaping from a big party balloon.
Kim Shanahan has been a Santa Fe green builder since 1986 and a sustainability consultant since 2019. Contact him at firstname.lastname@example.org.