The Answer in 6 Charts

With some much media discussion about the fear of another housing bubble, let’s take a look at some of the factors that contribute to a housing bubble.

Then you can decide if 2018 is the right time for you to buy a home in Northern Virginia.

  1. Unemployment Rate

Let’s face it. If you are concerned about having a job next month, you are not going to be in the market to buy a home.

Unemployment Rate

The average unemployment rate during the housing crisis was 7.3%. Nationally, the unemployment rate is now around 4%. In parts of Northern Virginia and Washington DC Metro area, the rate is lower than 4%.

Our local economy is strong and growing. Economic growth is a primary ingredient of a healthy housing market.

  1. Housing Affordability

It’s great to have a job, but that doesn’t necessarily mean that you can afford to buy a home. The chart below compares the median income to the median cost of a home since 1990.

Housing Affordability Index

2006 was the apex of the housing market before the crash. Housing affordability was at a low point. Once the bubble burst, home prices came down, and the Fed stepped in and started lowering interest rates.

2012 was the all-time peak of housing affordability thanks to historically low interest rates and distressed property sales.

Today, it is still more affordable to buy a home than at almost any time in the past 50 years due to low rates and wage growth. Rates will rise this year and home prices will increase, so now is the time to take advantage of the current market conditions.

  1. New Home Construction

So, you have a good job and can afford to buy a home. If you are concerned about a flood of newly constructed homes popping up in your neighborhood which will devalue your home’s value, take a look at the chart below of newly constructed homes from 1990 to 2017.

Reston Mortgage - Housing Starts

2006 was the peak of housing speculation with builders adding 2.2 million homes across the country. Since the market correction, builders have slowly increased the number of new homes, but they are still building about a million fewer homes today.

Going forward, builders will have a hard time increasing production due to a lack of skilled labor, building materials, available land and government and environmental restrictions. The needed repairs to hundreds of thousands of homes in Florida and Texas from the recent hurricanes will further limit builder’s ability to expand.

  1. Housing Inventory

One of the most telling differences between the housing market that led to the crash and now are housing inventory levels relative to the total number of households.

In the years leading to the bubble, millions of small and large investors bought and sold properties like stock day traders. Builders supplied more homes to be traded until the music stopped. Everyone realized that there was too much supply for the real housing demand and the market soon crashed.

The chart below shows the number of houses available in relation to the number of households.

Homes for Sale

Not only is housing inventory about half of what it was at the height of the bubble, inventory has reached historically low levels in many parts of Northern Virginia and the nation. Local county government studies have confirmed that there will be a shortage of houses available into the next decade and are revising zoning restrictions in an attempt to ease the short fall.

  1. Lending Requirements and Default Risk

The ability to borrow money to buy a home also impacts the housing market. Take a look at the graph below from the Urban Institute tracking the default risk lenders took over the past 20 years.

Default Risk

In a healthy market, lenders should approve mortgages with a reasonable degree of certainty that a borrower is going to repay the loan while taking some risk. The blueportion of the graph shows the default risk.

In the years leading up to the crash, lenders took too much risk and approved loans without verifying income and assets. This fueled the housing speculation that resulted in a meltdown.

In response to large defaults, lenders tightened lending requirements too much and eliminated virtually all risk of default, making it difficult for many qualified buyers to get financing.

Today, lenders are starting to relax standards a bit and more loan programs are available to help buyers qualify without having perfect credit or job history.

  1. Demographics: The Next Wave of Buyers

What article wouldn’t be complete without talking about Millennials. The average age of a first-time home buyer is 33 years old.

Next Wave of Buyers

Another factor that contributed to the housing burst was that the number of first time buyers coming into the market in 2006 was the lowest it had been in a generation.

Conversely, for the next decade there will be an increased number of Millennials entering the housing market. 

The housing market will ebb and flow over time, but it is clear from comparing multiple elements that we are more likely to experience a housing shortage than a housing bubble over the next decade.

So, the question is no longer about the direction of the housing market but whether now is the right time for You to buy a home.

We can answer your questions, help you compare your options and provide you with a Borrow Smart Plan for your new home.

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