“So, what do you think of this housing bubble?” I am sometimes asked. I’m not an economist, but as the old anecdote goes, if you ask two economists a question, you get at least five different opinions. Maybe one will match mine.
The shape of the bubble is always the same, but what creates the bubble can be very different. This is the case with the current bubble versus the bubble that led to the 2008 housing crash.
Do soap bubbles always burst? This was the case after the collapse of Lehman Brothers in 2008, the largest bankruptcy in American history. But sometimes the bubble can just deflate. This is my prediction for the current housing bubble.
In retrospect, it is clear that the 2008 bubble was the result of many factors, the biggest of which were the ridiculously simple underwriting rules for home loans, which basically meant there were no rules. I know because I got one of those loans.
In 2007, I got an “undocumented” loan, which meant no proof of income was required, only a credit rating of over 600. There was no down payment on the house, meaning there was no equity capital, and the monthly payments were only interest for 10 years. I bought a home for $ 50,000 below the appraised value, so I thought I had instant capital. Plus, prices were still going up, so I assumed that my capital was also going up.
Then it crashed in October 2008. Almost overnight, the home’s value fell $ 150,000 less than I paid a year earlier, which means a $ 200,000 drop in the illusion of fairness. The bubble holding me has definitely burst. I was underwater and drowned quickly. I bought high and sold cheap. I was not Warren Buffett.
Another consequence of the 2008 bubble was the wild speculation that publicly traded real estate developers were promoting in major metropolitan markets. They knew that without a loan, they would sell houses. They pumped them out as quickly as they could build them. When the accident happened, they were stuck holding hundreds of thousands of unsold homes.
Remember the $ 8,000 tax credit you received in 2009 for your first home buyer? It was touted as a way to get young families into homes. Yes, right. They might just as well have bought a house with an undocumented loan in 2007. The real reason was to clear out stocks so that publicly traded developers didn’t keep track of subprime mortgage bankruptcies.
The tax credit saved their asses and cleaned up their inventory.
Small markets like Santa Fe have never had redevelopments or unsold inventory, save for a couple of dozen speculative luxury homes in places like Las Campanas. In the Affordable Housing division that I was building, we opened 22 spec houses at the end of 2007 and sold each before the 2008 crash. We had no unsold inventory. The supply met the demand.
Today’s inventory? What kind of inventory? The real estate bubble in 2021 is driven solely by prices and purely market reasons. No inventory. In Santa Fe, housing shortages are in the thousands, and this is also true of virtually every market in America.
Of course, regulators, along with shortages of lumber and labor, contribute to price inflation, but this bubble is a classic situation where there is not enough supply to meet demand.
Ultimately, higher prices will reduce the pool of eligible buyers. Strong market demand will continue to drive supply. Credit rules can be simplified. National assistance programs are envisaged with an initial contribution.
Market equilibrium may be on the horizon. But this is far away the horizon. It is unlikely that we will hear a clap similar to the deafening clap of 2008. This will most likely be a long, gaseous sound of air exiting a large balloon.
Kim Shanahan has been a green building Santa Fe since 1986 and a sustainable development consultant since 2019. Contact him by phone email@example.com…