Here are three reasons why we’re not in a bubble.

I’ve been hearing all over the place lately that we are in a housing bubble. Today I want to set the record straight using three charts that will demonstrate that we’re not in a bubble after all.

Back in 2006, nearly everyone could qualify for a mortgage. The mortgage credit availability index measures how easy it is to get a mortgage; the higher that number, the easier it is to qualify. From 2004 to 2006, the index nearly doubled to around 900. Today, that number stands at about 130. Clearly, it’s not nearly as easy as it used to be to get a mortgage. At 1:30 in the video above, you can see a chart that shows how many buyers were able to originate loans with credit scores of less than 620 in the years 2006 and 2020—the difference is significant.

Secondly, today’s homeowners aren’t using their houses as ATMs the way they were back between 2005 and 2006. During the housing boom, home prices were skyrocketing and homeowners were taking out refinance loans on their properties. As soon as home values started to drop, many buyers and homeowners got into trouble because their homes were worth less than the money that they had loaned on them. A chart at 2:28 in the video above shows how many cash-out refinances are happening now compared to 2006. As of 2020, we’re at less than half of all the cash-out refinances, meaning that homeowners today are being a lot more cautious with the equity they have in their homes.

The root cause of the housing boom that we’re experiencing right now comes down to supply and demand. There’s a huge demand for homes right now because interest rates are extremely low, but there’s also a huge shortage of homes. Back in 2006, there were about seven months of supply on the market, right now, we have less than two months of supply.

It’s obviously a tough market to operate in, but that doesn’t mean we’re in a bubble.

One reason behind that is the fact that builders in the early 2000s were building a lot more homes than were necessary. When the housing crisis hit, those builders pulled back on their production volumes. As you can see in the chart at 4:12 in the video above, between 2010 and 2020, they built half the homes they had done between 2000 and 2010. There simply aren’t enough homes in the market to keep up with demand.

Bill McBride, author of the prestigious “Calculated Risks” blog actually predicted the housing crisis in 2005. Here is what he has to say about our current market:

“It’s not clear at all to me that things are going to slow down significantly in the near future. In 2005, I had a strong sense that the hot market would turn and that when it turned, things would get very ugly. Today I don’t have that sense at all because all of the fundamentals are there. Demand will be high for a while because millennials need houses. Prices will keep rising for a while because inventory is so low.”

The bottom line is that today’s market is totally different from the one we experienced back in 2005. It’s obviously a tough market to operate in, but that doesn’t mean we’re in a bubble.

If you have any more questions about the current market and what conditions mean for you, don’t hesitate to reach out to me. I’d love to have a conversation with you.