Robert Shiller, the Yale economics professor who previously predicted the dot com stock market bubble and the housing bubble of 2007 believes the current housing market is headed for trouble over the next 3 years. He cites a number of factors, including the fact that housing prices haven't fallen since 2007-09, the steep decline in existing home sales, the decline in new permits for construction, and the inventory of new construction that still hasn't been finished for sale. Shiller believes there is a possibility that housing prices will decline by 10% in 2024 and 2025.
A 10% decline has only occurred twice before, during the Great Depression and the Great Recession. While the idea of a 10% decline in housing prices is still speculation, such a drastic decline would reveal the post Covid-19 housing boom as just another housing bubble.
But what factors make up a housing bubble? There are typically three things economists look for. First, speculation. Speculation occurs when investors rush in to buy homes because they are chasing soaring housing prices. The soaring housing prices is what has fueled the housing market over the last 2 years. With investors and hedge funds buying record numbers of homes and homebuilders building in record numbers, the race to buy due to speculation was unprecedented.
Second, a proper housing bubble requires a good bit of overvaluation. This means that housing prices goes beyond what the average person can afford based on the job market. It is safe to say that we passed that point a long time ago. Homeowners are trapped in 30-year mortgages where they owe significantly more than they can afford in the long run. If prices drop, this will cause major ripples throughout the market.
The third element of a housing bubble is a price decline. Afterall, it can't be a bubble unless prices eventually decline. The potential decline in housing prices remains an unknown factor. Different experts have different opinions on the matter. Some experts cite the lack of subprime mortgages as a reason why prices will remain steady. Another factor is that home inventory is still low in historic terms. We are currently looking at a 3-4 week inventory, which is going to keep prices steady. If inventory levels rise to 6 months or more that is a surefire sign that the bubble is bursting. Again, the exact amount of inventory on the market is in dispute. While companies like Zillow advocate the position that there is no over supply of houses, many experts disagree with their assessment and believe that many large markets across the country could see oversupply numbers by 2023. Moreover, there is a significant amount of new construction that has not been completed and if those homes hit a weak market they could push the housing market into a spiral.
If you're a homeowner what should you do? The main thing to do is to protect your equity. We are seeing a push by some money lenders pushing home equity lines and cash-out refinances right now. Reducing your current equity level will almost certainly lead to a foreclosure or a forced sale of the home in 2-3 years. Otherwise, save money and make sure that you have enough savings to keep making mortgage payments. Also, call Florida Consumer Lawyers before you talk to real estate agent or realtor. Our lawyers are real estate experts and are much better positioned to help you out over a realtor who only can sell your home.