According to the Federal Reserve Bank of Dallas, we may be in the midst of a housing bubble, the likes of which we haven’t seen since the early 2000s. Citing “abnormal US housing market behavior” driving housing prices “increasingly out of step with fundamentals,” the bank warned that corrective policies could shock the market and burst the bubble.
Here’s what’s going on: Essentially, housing prices are becoming further detached from reality. This is likely because buyers in the current market are anticipating an even more difficult market in the future. This prompts them to make offers on homes not based on current value but based on buyers’ perceptions of the housing market—even if the home is overpriced right now, it might be even more out of reach in six months. Think of it as a real estate version of FOMO.
Whether or not these buyers are correct in their forecast is immaterial—their offer, guided by this forecast, has already driven up housing prices. It becomes a self-fulfilling prophecy: Buyers, in their fear that housing prices will continue to rise, raise housing prices.
How COVID-19 Drove UP Housing Prices and Inflated the Bubble
Peoples’ fears about constantly rising housing prices are well founded, particularly over the last two years where COVID-19 and its consequences have driven prices up for three key reasons.
First, the pandemic caused a decrease in housing supply. Particularly in the earliest stages, people were encouraged/mandated to stay locked down in their home—this was not a time to put your house on the market, open it up to strangers, and then relocate.
Second, the pandemic caused fractures and breaks in global supply chains, impacting companies’ abilities to secure lumber and other essentials for manufacturing new homes. Now, inflation is driving the prices of these materials even higher; home construction has become slower and more expensive.
Third, the pandemic accelerated a trend we were already seeing: Investors are gobbling up more and more of the homes on the market. Currently, investors own one-third (33%) of the homes in America, a marked 5% increase over the last decade. Also of note, iBuying companies like Zillow own only 1% of homes nationwide, but in certain urban areas own as much as 11%. These companies purchase homes, nominally improve them, and then sell them for a higher price. Astute readers will immediately understand how this further drives up housing prices.
How the Bubble Could Burst
If officials determine the housing market is too volatile, they could enact policies to stabilize it. This is a rational choice to correct an irrational problem, however, and the fear is that in shifting interest rates and driving investors away from property, prices will return to reality so abruptly that it will send shockwaves through the market.
Think of it this way: If Nick and Greg overpaid for their new house in December based on their belief that housing prices will continue to rise, then, when they stabilize, Nick and Greg will find that they paid more money for their home than its actual value. This upside-down mortgage in which the borrowed amount outweighs the property value became a hallmark of the 2007 recession and housing crisis.
Of course, this is 2022, not 2007, which was also characterized by sub-prime lending to unqualified buyers. So, while an actual bubble burst seems unlikely, a correction in the housing market seems inevitable. It just won’t be nearly as messy.
Any Housing Market is a Good Housing Market for Credit Resellers
Whatever happens with housing, it’s good to be a credit reseller.
If the bubble slowly deflates, new homeowners will finally be to crack into what has been a very inhospitable housing market. If the bubble bursts and mortgage defaults run wild, a whole lot of people are going to be moving into apartments. Both home loans and apartment rentals require background and credit checks, and while the humanitarian in us hates to see people lose their homes, the fact remains that credit resellers stand to benefit from really any changes, sudden or gradual, in the housing market.
In fact, the only disruption they should be worrying about would come from falling out of compliance with the Fair Credit Reporting Act (FCRA). FCRA governs the protection and appropriate dissemination of sensitive consumer data, and resellers held accountable for selling credit reports to businesses that are not in compliance. As housing trends accelerate credit checks, resellers must be mindful that their customers do not put their business at risk.
That’s why TrendSource offers OnSite Inspections for Consumer Reporting, to help companies document this compliance among their customers. Credit resellers can order physical or virtual OnSite Inspections online or can reach out for further information.
It’s always a good time to be in the credit reselling business…unless you fall out of compliance. Don’t burst your own bubble.