Real Estate Boom or Bubble?

Published September 23, 2021
Last updated November 15, 2021

A Booming Market

The real estate market is still booming, but it’s also showing signs that it may be on the brink of another bubble. This time with potentially devastating consequences for our global economy.

Black Knight, a housing analytics firm, reported that more than $63 billion in equity was pulled out across 1 million cash-out refinances in the second quarter of 2021.

The net worth of American homeowners is at an all-time high. Owners hold a record $9 trillion in home equity, and the average mortgage holder has $173,000 tappable for investments ($20K more than before).

Homeowners Cash In On Their Property

There is a bubble-like dependence on credit, as homeowners are using their assets to generate cash.

The soaring prices have caused an affordability issue as well as more than just financial troubles for homebuyers – many cannot find homes in their desired location or under budget.

The housing market is a great way to boost your finances during times of economic distress. Many people are taking advantage of the opportunity to cash in on their property and take money out. Home equity can be used for things like paying down existing debts or buying an even more expensive home if necessary – it’s actually one of few assets many people use as their safety net in tough times (mortgage being another).

2007 Real Estate Bubble Fears

However, when homeowners tap into the equity of their homes as if it were an actual credit card, they are relying on property values to keep climbing. This practice happened just 15 years ago, before the 2007 bubble burst, and had major consequences for America’s entire economy when banks needed a bailout.

The 2007-2009 financial crisis was a wake up call for many people who were just starting their investing careers. It’s been over 10 years since then, and markets are back with full force.

The good news?

The current market is much more robust than it was in 2007

Mortgage holders who are currently in active forbearance have a higher level of equity compared to those who were struggling during the 2008 Financial Crisis. Ninety-eight percent, or nearly all mortgage holders, had at least 10% home equity when the Black Knight study was conducted (with some having over 100%). Only 7% of homeowners would be left with less than ten percentage points, once you account for interest payments, plus taxes and insurance premiums as well.

With a strengthened equity position, it is possible that these homeowners are able to ride out economic pain. The federal government’s mortgage moratorium expired at the end of July placing roughly 1 million people on pandemic forbearance plans back in line for payments. However, delinquency rates only rose slightly during this time, suggesting stronger ownership has helped those with loans stay afloat financially and avoid falling behind on their mortgages even further than they already have.

Source: Ben Winck, Business Insider

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