Is the Northern Virginia Housing Market Signaling a Bubble? Context Means Everything.

Majority of Home Sellers & Buyers Worry About a Housing Bubble & Price Crash

Naturally, home sellers and buyers are often concerned about home prices. It’s an asset class they either own or are considering owning. This concern becomes even greater when the impacts of the Great Recession and 2008 housing collapse are still visible in the rearview mirror for so many people. In 2017, ValueInsured surveyed 1,079 adults and 58% agreed there would be a “housing bubble and price correction” in the next two years (sometime in 2018-19). That was up 46% from the previous survey. Meanwhile, 83% of respondents believed it was a good time to sell their home. As prices have only climbed higher since the survey so too have consumer fears about a “housing bubble and price correction”. This is one of the most popular questions I receive from my buyers, sellers and investors alike – Are we in a housing bubble?

Here are a Few Warning Signs by So-Called Experts – Do They Have Any Value?

You can Google the topic “housing bubble” or “housing crash” and find a number of search results leading you to articles. Here’s an example of warning signs I read in just one article today.

  • One sign of an asset bubble is that home prices have escalated. National median family home prices are 32% higher than inflation. That’s similar to 2005 when they were 35% overvalued.
  • The Housing Bellwether Barometer is an index of homebuilders and mortgage companies. In 2017, it skyrocketed like it did in 2004 and 2005 just before the 2008 housing crisis. The SPDR S&P Homebuilders ETF has risen 400% since March 2009 contributing to the high risk of a housing bubble.
  • The Case-Shiller national index hit record highs in December 2016 providing even more support for the idea of a frothy housing market.
  • Fannie and Freddie lowered the FICO score threshold used to delineate prime and sub-prime borrowers. It used to be a score below 660, but now it’s 620 introducing significantly more default risk to the market.

Most Warnings by So-Called Experts Don’t Dig Deep – Context Means Everything

The above warnings on their own could appear problematic, but context means everything. Most warnings don’t dig deep and lack serious analysis. For example, consider the warning about the precipitous rise in the homebuilder index. While true, the index is also part of the overall stock market which has risen the same 400% since the March 2009 bottom. While a 400% rise in homebuilder stocks on its own appears large, it means very little when put in the context of all the other ships rising with the tide. Moreover, housing stocks still remain well below their former 2005 price highs.

Yes, the Case-Shiller index hit an all-time high in 2016, but context here is equally important. The all-time high technically occurred when the former 2006 high was eclipsed last year. However, this happened after a 10+ year recovery from the 30% decline in home prices during the Great Recession.

Likewise, statements regarding lowering the FICO score requirements are woefully mischaracterized when not taken in the context of all the other changes implemented to strengthen lending practices. The mortgage system has shifted dramatically for the better since 2008 with improvements in underwriting, technology, and quality controls. The mortgage system today is safer and sounder due to changes in credit eligibility standards following the crisis. Fannie Mae and Freddie Mac no longer participate in the purchase of high-risk, unqualified mortgages as they did prior to 2008 making the market for this paper now virtually non-existent. “Today’s mortgage system produces a stronger quality borrower with lower default risk and a much stronger mortgage securitization chain,” said Brian Kamin, Senior Mortgage Loan Officer with George Mason Mortgage.

The Graph Below Reveals Additional Compelling Context in Terms of Bubble Risk

I prepared this graph to offer even stronger context when it comes to the current state of Northern Virginia housing prices. The graph shows the House Price Index for Fairfax County, VA as tracked by the St. Louis Federal Reserve Bank. Fairfax County is the largest statistical area within the Washington, DC metropolitan region and represents approximately 20% of the metro area’s population. Fairfax County is also the largest housing sub-market in our region accounting for $9 billion of the total $19 billion Northern Virginia home sales in 2018. Fairfax County is as good of a housing barometer as any in our region.

Appreciation 2

I’ve listed below what I believe to be the most important pieces of information that can be pulled from the graph when considering warnings by others of an approaching housing bubble and price collapse.

  1. During the last 43 years (from 1975 to 2018), home prices have increased by 5.1% year-over-year (yoy). The current period’s appreciation of just 3% yoy (2009-18) measurably lags the overall average.
  2. The level of appreciation in the current home price rally ranks third of four when comparing against other rally periods. Moreover, the current 3% yoy move is only a fraction of the 11% yoy high velocity experienced during the 1997 to 2006 run-up.
  3. There have been just two definable housing market collapses since data collection began in 1900. The Great Depression in the 1930’s and the Great Recession in 2008-10. Generally speaking, when considering average hold periods, real estate owners have experienced appreciable gains in asset class prices during almost every time period throughout history, except for the very specific time frames of the Great Depression and Great Recession. Both of which account for just 5% of the 120-year time frame.
  4. Home prices broke-out to all-time highs in 2018. However, this occurred only after a 12 year recovery period. The break-out occurred after forming a constructive price base. It didn’t occur in the context of successive multi-year new highs like the run-up to 2006. For example, in the 2004-05 period alone home prices increased 26% on top of massive multi-year gains booked the previous 7 years. This type of price action is the hallmark of a climactic top.
  5. The vertical grey areas in the graph show the last five recessions on record since 1975. The yellow boxes capture the slope of the lines to illustrate how home prices have generally appreciated through previous recessions. The exception being the 2008 housing collapse which was the root cause of the Great Recession. For you investment property owners, it’s also reassuring to know the rental price index has appreciated through every recession on record since the 1940s. When considering future business cycles, it’s important to realize recession doesn’t necessarily mean housing collapse.

Key Takeaways

Things are not always as they appear. Often times blanket warnings issued by print and television media pundits don’t dig deep, nor engage in serious analysis. Important context and perspective is often omitted or even unknown. Hopefully, the information I’ve provided here will position buyers and sellers to be able to better develop a more informed opinion about the probability of an approaching housing market decline and the potential impact if one occurs.

As a Real Estate Professional who specializes in the Northern Virginia region, my goal is to provide clients with the most insightful information and analysis to help them make the most valuable decisions in every part of a real estate transaction. I differentiate myself from other agents in the areas of knowledge, superior customer service, and ultimately positioning my clients with the most compelling agent value when they engage in the process of buying or selling real estate in the Northern Virginia region!

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