Why you don’t need to worry about an upcoming housing bubble.
In 2006, we were encased in a housing bubble, and many people think another one may be starting. Today I’m discussing why that’s probably not the case. There are several distinct differences between the 2006 real estate market and the one we have now, even if they seem very similar.
One of the most crucial differences is that in 2006, the new construction market was vastly overbuilt with historically high vacancies. The relatively low cost of funds, materials, and transport all contributed toward more new construction. Then when supply far outstripped demand, things fell out of balance, and a price correction became necessary. Also, back in 2006, the mortgage industry was engaging in business practices that were damaging the value of mortgage-backed securities on the secondary market. That meant the credit market had to tighten in response, which further exacerbated the supply and demand issue.
“Don’t let yourself feel like you’re being bullied by the ghost of 2006.”
Thankfully things look different these days. Rather than oversupply and speculation driving the market, today’s price increases are the result of inflation and a historically low supply of homes. That’s causing plenty of homes to sell over their initial asking prices. Also, supply chain problems and the cost of materials have slowed new home construction, which again exacerbates the supply and demand issue. Additionally, today’s stricter mortgage industry standards mean that secondary mortgage products (which eventually affect pricing) such as mortgage-backed securities and collateralized debt obligations are much more stable than they’ve been in recent years.
Long story short: There are a few issues in the market right now that are causing some congestion, but they’re likely to slowly and steadily right themselves back to normal, rather than all at once in a bubble and crash, as we saw back in 2006. Eventually, inflation will ease, new construction will increase, and more people will put their homes on the market. Though it’ll happen slowly, it will happen.
There are plenty of reasons to buy and not to buy a home, but you need to make the decision that’s right for you. Don’t let yourself feel like you’re being bullied by the ghost of 2006.
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