Nov 3, 2020

B – B – B – Bubble???

I just got ‘Bubbled’ again.

I was in a conversation with a client who dismissively called the most recent price appreciation another real estate bubble and refused to accept any evidence to the contrary. At first I was a little offended, and then I asked myself if it could be true.

Soap Bubbles

Are we in another bubble? As someone who had a front row seat to 2008’s Bubble-Palooza, I am not interested in a) a dealing with another one or b) being blindsided by it. Living through the last one has made me hyper-sensitive to the potential coming of the next one and, needless to say, I would reeeeeally prefer not to be a part of it.

So here is the result of my deep dive on the market of 2017 compared to 2008.

2008, The Year it Went ‘Pop’

Maybe it really was a giant Wall Street Ponzi scheme and the last one in lost the most.

When Wall Street imploded and the ripples spread, it manifested itself with a complete and total freeze in lending. When mortgage lending stops, no one buys housing. And I don’t care what you own, when no one can or will buy it, it isn’t worth what it once was.

So when the dust settled, we had all lost somewhere between 20 and 40% of our collective housing value. And with a country so dependent on housing, that hurt a lot of people – badly.

Are We at It Again?

Let’s not ‘Call Bubble’ quite yet.

But since price is the one thing we all understand, let’s take a look at what has happened to pricing.

  • Pricing is accelerating, especially if you only started paying attention in 2011.
  • Spring markets have been insane.
  • From the outside looking in, it feels a little 2007ish.

But here is what the big numbers say.

From 2007 to 2011, the average home in RVA lost a little over 20% of its value (23% according to the data I pulled). That said, the data shows the average loss is for all homes in the region — and averages don’t always tell the right story.

The more accurate story is that markets in the aggregate are comprised of many sub-markets, each of which have differing inputs and characteristics. To really understand what is going on, you need to spend a bit of time looking at the individual market segments, not the market as a whole:

  • Urban markets have recovered the quickest and have surpassed 2008 prices.
  • Inner suburban markets (30 minutes or less to the city center) are almost back to 2008 levels.
  • Markets outside of 30 minutes are still trailing 2008.

The lesson here: Don’t assume that all markets are the same just because they are a part of what we like to call RVA. The overall RVA market is an extremely diverse one with many housing types, styles, ages and sizes.

Don’t make the mistake of projecting conditions equally across all markets.

Lending is the Driver

Lending today looks nothing like it used to.

The CFPB (Consumer Federal Protection Bureau), created by the Dodd-Frank Financial Reform Act, is probably the biggest difference, but the lack of Mortgage Insurance companies and the lack of direct Wall Street involvement has changed the lending environment substantially. And on some levels, that is a good thing.


The Federal Reserve Bank of NY published a report that before the bubble, ARMs (Adjustable Rate Mortgages) accounted for nearly 40% of all mortgages issued. By 2015, that percentage had fallen to just over 5%.

So in 2008, some 40% of homeowners were exposed to a mortgage payment that could increase 200-300% in a 2-3 year span. The market now has a 5% exposure to the same risk. In my mind, that is far healthier.

Debt to Income Ratios

Our relationship with housing seems to have changed, too. We are no longer making ourselves as house poor as we once were.

When less of our income goes towards housing debt, foreclosure risk decreases.

Owners or Renters?

In 2008, homeownership peaked.

In 2017, it is back to levels not seen since the 1960’s, when the 30 year mortgage first appeared.

Is homeownership an admirable goal? Yes. But is owning a home everyone’s destiny? Unfortunately, no, it isn’t.

The Return of Equity

Lastly, equity seems to be returning.

Again, PHEW…

When homeowners have equity, it is a good thing. Equity prevents foreclosure and increases borrowing power in times of need. And while equity is only equity when values are greater than debt, where we are now versus where were then looks far better.

Credit Strength

Sometime in the latter 1990’s, the mortgage market began to bet on pricing increases overcoming low equity. Lower down payments increased the buyer pool which in turn began to increase prices. Thus, a 5% down payment quickly turned into 10 to 20% equity, alleviating much of the risk to the lender.

With prices accelerating, lenders fueled the fire further with the introduction of adjustable mortgages, 100% (or more) loans, and decreased credit standards.

Effectively, the market began to create buyers from a segment of the population who (sorry) should not have been buyers. Once the buyer creation process became unsustainable, the Ponzi scheme collapsed.

But see this recently published report — according to Core Logic, mortgage credit looks more like 2001 than 2008. Again, this is positive.

The Inventory Impact

Talk to anyone with knowledge of the market and they will tell you that the impact of low inventory is extreme.

See the chart below:

Housing inventory is down as much as 70%.


And again, that is on the average. Look at the individual markets to get a better picture.

23220 (Fan/Jackson Ward) had over 300 active properties in February of 2008. In February of 2017, there were 30.

The bottom line is that the market is not going up due to shoddy lending, it is 100% about inventory.

Just Build More

Hey builders, your turn! Can we please build more houses and build them now?

Unfortunately, it doesn’t seem to be happening.

I am not sure why the building industry is not doing more, but right now, new construction is not supplying the increased demand. Perhaps it is construction lending, perhaps a lack of lots, or perhaps the place where the most housing is needed (closer to the city) does not allow for building ‘en masse.’

Regardless, the inventory issue does not appear to be solvable by cranking up the new house market.

No Bubble Then, Correct?

I’ll go ahead and stick my neck out and say, ‘I don’t think so.’

[ But if you would like to read some counter arguments here they are … ]

Should we expect 5% or more appreciation on housing each year? I don’t think that the answer is yes, but I am not sure that it is no, either. Until we a) create more inventory, b) create it in the right places, c) don’t see rates go to 10% and d) don’t experience economic largesse, then please tell me why we won’t?

To recap:

  • Inventory is down by anywhere from 60-90%
  • Pricing is back to 2008 levels almost a decade later
  • Homeownership is at its lowest point in 50 years
  • Housing starts don’t seem to be rising
  • The quality of credit is its best in 15 years

I don’t see the things that caused 2008 present in 2017.

If you entered the market in 2012, then a) you are brilliant and/or lucky and b) only know rapid appreciation. It feels weird. What you have been experiencing is not rapid appreciation above natural levels but rapid appreciation back to trend. Those are two entirely different situations.

And yes, if you are a first time buyer and have lost about 5 bids, it sucks. We get it and feel for you. Don’t lose faith. Bidding wars today are occurring between those who should buy housing, not between those who should not.

So We Are in the Clear?

I am not willing to say that we are entirely in the clear. There are always events that can impact housing so don’t assume that the future is without danger.

  • Rates are rising and at some point, that impacts our ability to buy. As of yet, rates have not injured values and most predict that rates will not impact the market dramatically until they jump into the 7’s.
  • The Federal Government is making noise about pulling out of Fannie Mae and Freddie Mac, and that would be a blow. If Fannie and Freddie become completely private, lending will change substantially, i.e. the 30 year mortgage will likely go away. But the likelihood of this occurrence is well into the future and over the horizon. If/when we get to that point, there will be an adjustment.
  • The Federal Reserve bought in a ton of bad mortgage debt from 2008 through 2015 and will need to unload it at some point. How they will do so is, as of yet, unknown.
  • And our good friends in Wall Street are always up to something. I am not sure what it will be, but a CDO wrapped inside of a MBS surrounded by a CDS is probably being discussed on the 70th floor of a high rise in NY as we speak. Hopefully, they have learned their lesson, but I doubt it.

Any market has its kryptonite and lord knows housing has plenty. But as of now, the causes of this pricing run are not the same as last time.

Lets Stop with the ‘B Word’

So lets not just label any run up in values as a ‘Bubble.’ It only decreases the power of the word and trust me, this is not a 2008-style bubble.

But if you want to know when the next bubble is happening, here are some signs:

  • Mortgage Insurance Companies start showing up in droves
  • First Time Homebuyers begin to use 1 Year ARMs
  • Interest Only Mortgages
  • 100% Loan To Value Mortgages
  • Homeownership approaching 70%
  • Plans in place to privatize Fannie Mae and Freddie Mac

For now, 2017 shares no commonality with 2008 other than price increases that seem aggressive. The important thing is that the reasons why could not be any different.