By Stephen Tuttle | July 10, 2021

There is a shortage of housing, at all prices, locally and nationally. Materials needed to build housing are also scarce, as are skilled and skilled workers, a product of closures at the height of the pandemic. With supply and demand in play, prices have increased at all levels of the construction process.

However, there is no shortage of buyers, so demand remains high in the face of a short and increasingly expensive supply. Potential buyers, fearing they might end up with bad choices they can’t afford, begin a panicky version of home buying. This further reduces the supply, which further increases the costs, which further increases the demand, which further reduces the supply …

It certainly has a familiar feel. The real estate bubble burst in 2007, helping to fuel the Great Recession, still an unpleasant memory. We are assured that the circumstances are very different now.

This real estate bubble began to expand in the early 2000s, as house prices rose rapidly. Mortgages have been approved for almost everyone, and subprime mortgages have become their own form of investment vehicle. Taken together, they brought in significant returns, but carried significant risk, as many of these mortgage loans were postponed; monthly payments would explode with lump sum payments in years to come.

Banks, insurance companies and hedge funds have invested huge sums at all levels of the housing market. This helped prop up bad debt until a prime rate hike by the federal government blocked the housing market. When these lump sum payments came due, many people could not afford to pay them, some simply left, foreclosures exploded, home values ​​plummeted, and an economic house of cards began to collapse. Cascade. Twenty-five major mortgage companies have declared bankruptcy. The auto industry, investment firms, banks and part of the insurance industry have required government bailouts in successive administrations.

In the states that have seen the fastest growing populations and demand for housing – Arizona, Texas, Nevada, Florida – 25-40% of homebuyers have found themselves underwater: i.e. As home values ​​plummeted, their mortgage obligation was much higher than that home.

(It should be noted here that the people who weathered the economic storm and kept their homes fared very well, indeed. For the most part, their home’s current value is considerably higher than it is. was at the peak of the previous price hike.)

We can be assured that very few of these circumstances currently exist. Mortgage rates are historically low and lenders remain more cautious than they were in the early 2000s. Mortgages are still bundled and offered as investments, but low interest rates eliminate the risk paradigm high / high pay that became so attractive two decades ago.

The pandemic also helped boost demand, as many office workers found they could work from home and no longer needed to be in a dense urban core near their workplace. They can now relocate to an area that offers them a lot more housing for their money.

Perhaps more importantly, there is less institutional investment and less housing purchases as speculative investment. Most people are now buying a place they want to live rather than an investment.

This is not to say that there are no worrying signs, not the least of which is the dramatic increase in house prices. Even accepting that there is a supply and demand dynamic at play ignores some of the skyrocketing home costs. This is raising concerns that there will be some buying frenzy from people hoping to avoid even higher prices in the future. We read stories of several potential buyers offering cash well above the asking price of a home on the day the home goes up for sale. Or auctions that can double the original asking price.

The S&P CoreLogic Case Shiller US National Home Price Indices (yes, it’s really called that) shows that average home prices have risen by over 12% over the past year, but by nearly 3%. % over the last month alone, the fourth consecutive month of acceleration increases.

The Zillow Home Value Index indicates that average home prices in Traverse City, where the median price is now nearly $ 323,000, have increased some 16 percent over the past year. Other places are almost out of control: Home prices in Austin, Texas are up 42% from last year and are now over $ 700,000 on average. San Jose, California saw an even more impressive 45% increase, bringing the average home price to $ 1.2 million.

These increases are the largest since 2006, when this real estate bubble was about to burst. But things are different now. Very few homeowners are underwater, stocks are strong, the building materials supply chain will become more robust, skilled workers will return to work, housing stocks will rise, demand will ease and the balance will be. restored.

At least, that’s what we are told.