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Is Central Florida In A Housing Bubble?

As prices continue to rise and buyers continue to compete for a limited number of homes in the Central Florida housing market, a common question we’re hearing from our clients is:

“Are we headed for another 2008 style housing crash”?

Economists, statisticians, Realtors®, and mortgage bankers don’t seem to think so, and I’m going to share with you our top 3 reasons why this market looks safer and more sustainable than what we’ve seen in the past.

1. Supply Is Very Limited

In real estate we measure supply in terms of “months of supply. In a given neighborhood, if 120 homes sold in a year, then we would say that one month of supply would be 10 homes, 2 months supply would be 20 homes, etc. A balanced market where neither buyers or sellers have an advantage would typically see about 6 months of inventory on the market at any given time (or 60 homes using our previous example). Currently in Central Florida, most neighborhoods and communities have between 1.5 to 2 months of supply, placing us in a strong seller’s market. Naturally, when supply is low and demand is sufficient, prices will rise. In 2008, prices continued to rise despite inventory swelling to nearly 11 months of supply. In contrast, we’ve been in a seller’s market with about 3 to 4 months of inventory for the past 5 years, and low interest rates coupled with increased demand from Northeast and Western buyers are continuing to drive a logical rise in values.

2. Home Equity Is High

In 2008 homeowners were buying homes with little or no money down, many of them purely as speculative investments, hoping to capitalize on rising prices instead of establishing a new home. When the market didn’t rise at the rate speculators anticipated, there was no equity to cover the cost of selling and nothing to lose by walking away. Today, 75% of all mortgaged homes in America have at least 7% equity in their homes, and 65% of mortgaged homes have 10% or more. In fact, CoreLogic® reported that the average homeowner gained nearly 17% in equity just in 2020 alone. With homeowners sitting on substantial equity, and buyers standing by ready to purchase homes as they hit the market, we think this is a sustainable and healthy balance.

3. Risk of Default Is Low

In the 2008 mortgage crash, lenders had fallen into a habit of making risky loans on stated income, unverified asset balances, and rushed or non-existent underwriting policies. Some buyers were actually receiving loans that exceeded the appraised values as lenders anticipated appreciation covering their risk in future months. Today, low mortgage rates are making homes more affordable than ever before, but underwriting standards remain high and borrowers are required to prove their ability to repay the loan. In addition to these increased lending standard, all borrowers are required to put some equity into their loan at closing, and mortgage insurance reserves and premiums have been bolstered. You can see in the chart below that lending standards today are as high as they were immediately after the crash when lenders reduced their risks and raised standards drastically.

If you’ve been putting off purchasing a home because you’re afraid that we’re in a housing bubble, then we’d like to discuss your real estate goals and help you decide if now is the correct time to buy, or if waiting to purchase in the future is a better plan of action.

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