Whether you live in Texas or Puerto Rico, you’ll receive quite a bit of useful information from this article. Many homeowners thinking about retiring are worried if one of their biggest assets, real estate, is about to plummet.  Are you retiring & worried about a housing crash?

In this article we will make the case that although a few housing data points are elevated; This is not currently the 2007 Housing Bubble. You will see after reviewing five key drivers, that housing today is rising for the right reasons, and the housing sales forecast is not as bleak as it may seem.

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"Prices are now 46% higher than their last peak during the housing boom in 2006" 

 CNBC recently reported that in the S&P CoreLogic Case-Shiller 20-city home price index, out at the end of December,   climbed 18.4% in October from a year earlier. The hottest markets were Phoenix (up 32.3%), Tampa (28.1%) and Miami (25.7%). This brings up the question. Are we are in another 2007 housing bubble and why is this different?Get-a-Retirement-Analysis


Why is this housing market different that the 2007 downturn? The key housing market data differentiating the current real estate market from the 2007 real estate market, are positive events for housing that we did not have in 2007.

1. Home equity is at record levels, which reduces the foreclosure risk we saw in 2007.

2. We had too much supply in 2007 versus today's markets, where we are still short 4-5 million homes and five years away from supply meeting demand   .

3. Demand for housing dropped off in 2007 versus today’s market, where demand for houses is high and there are more Millennial and Gen-Z buyers than baby boomers selling.

4. Replacement Costs are a floor of value and currently the cost to reproduce a home is rising because of shortages and higher labor costs.

5. Affordability and Multiple of Rents Valuations at current rates do not show bubble pricing versus the 2007 market multiples.

Home Equity

The equity in the average home is historically high.  Total U.S. home equity stood at a record $23.6 trillion at the end of the second quarter, according to Federal Reserve data.    According to National Mortgage Professionals,    In the third quarter there is a substantial amount of tappable equity — the sum borrowers can generally take out of their homes while still leaving at least 20% as a cushion. By the end of the third quarter, borrowers had a record $9.4 trillion in tappable home equity collectively, or an average of $178,000 per borrower, according to Black Knight  If we compare this to the 2007 Bubble, home equity was just $1 trillion. Additionally, mortgage debt has decreased significantly, standing at 46.1% of the GDP, from 73.3% during the housing bubble. This is not a surprise as JP Morgan Chase CEO Jamie Dimon states  "The US Consumers debt-service ratio is better than it’s been since we’ve been keeping records for 50 years"

This low debt and equity growth also has enabled many families to finance home remodeling, such as adding an office or study, further adding value to their home.  This contributed to a record level of home improvement spending in the last 12 months, and a significant increase in annual home price growth. As home equity has drastically increased through the pandemic economy, many homeowners have cashed out on their equity, with net equity extraction for 2Q 2021 standing at $142 billion, or 3.15% of disposable income, compared to that of 8% during the housing bubble. 


We can see in the U.S. foreclosure market report, that home equity increases have also reduced the amount of single-family foreclosures & overall foreclosures. However, due to the expiration of the moratorium, foreclosures have seen an uptick. "As expected, now that the moratorium has been over for months, foreclosure activity continues to increase," said ATTOM. Equity has increased for many of these distressed homeowners and now many may have enough equity to renegotiate a new loan. Any remaining foreclosures hitting the market into 2022 could be absorbed by eager home buyers, or investors and institutions looking for homes to buy as rentals.


Housing Supply

Housing supply growth begins with lot supply. According to Zonda’s Lot Supply Index(LSI), we now have hit a new low in the third quarter. The latest LSI captured a 36.8% drop compared to last year with every top market across the country categorized as “significantly undersupplied.”, Los Angeles, San Diego, and Charlotte currently have the tightest lot supply among major markets due to long governmental reviews, NIMBYism, and restricted land supply.

"The U.S. is short 5.24 million homes, an increase of

1.4 million from the 2019 gap of 3.84 million,

according to Realtor.com"


November Housing Assuming housing formations continue at five year average, the average rate of home completion would have to triple to close the gap in home completions and housing formations in 5 to 6 years. Another way to look at the numbers is if housing formations sustain the slow 2021 rate and home completions continue to be strong, it will take double the rate of home completions to close the gap in five years 

Todays supply numbers are due to 10 years of very low new home starts, aging of millennial's into homebuying years, pandemic shift away from cities, record low mortgage rates, a move away from multi-family rentals, single family homes, second home buying, Baby Boomers aging in place and now cost of materials and labor costs stifling new home starts. 

The fact is the U.S. is short 5.24 million homes

Housing shortage of 5.24 million homes between 2012 and 2021

The 5.24 million shortage of homes is an increase of 1.4 million from the 2019 gap of 3.84 million,  according to Realtor.com.  The lack of inventories started in 2008, when new home starts went from 40k per million since 1960 to 20k per million for 10 years starting in 2010. The construction of Single-family homes has increased steadily since it bottomed in the midst of the 2009 Great Recession; It is still lower than before the housing boom, and is in fact, running at its slowest pace since 1995. Looking at 2019, more new homes were completed in 2019 than in any other year of the past decade, and still there were far fewer homes built than in any other non-recession year in the postwar era. Particularly when adjusting for population size, which is key for predicting household formation. Privately‐owned housing starts in November were at a seasonally adjusted annual rate of 1,679,000
. This is 11.8 percent above the revised October estimate of 1,502,000 and is 8.3 percent above the November 2020 rate of 1,551,000. Currently there are 734 thousand multi-family units under construction.  This is the highest level since July 1974 yet it will not have a big impact on the shortage.   Houses that have started are also being delayed because of cost increases. Approximately 15% of builders said they are putting down concrete foundations (Considered a Home Start) and then holding off on framing the house. These facts are further evidence that builders are delaying building due to the substantial increase in costs for labor, lumber, copper, rebar and other materials. Given the current market conditions, homebuilders would have to double their recent new home production to alleviate the shortage, in five to six years.


"New Construction declined 0.7% in October to

1.52 million rate


The graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.


Inventory is very low and was down 13.3% year-over-year (YoY) in September.  Also, as housing economist Tom Lawler has noted, the local MLS data shows even a larger decline in active inventory (the NAR appears to include some pending sales in inventory). Lawler noted:

"As I’ve noted before, the inventory measure in most publicly-released local realtor/MLS reports excludes listings with pending contracts, but that is not the case for many of the reports sent to the NAR (referred to as the “NAR Report!”), Since the middle of last Spring inventory measures excluding pending listings have fallen much more sharply than inventory measures including such listings, and this latter inventory measure understates the decline in the effective inventory of homes for sale over the last several months."

It seems likely that active inventory is down close to 28% year-over-year.

Months-of-supply at 2.1 months is very low, but still above the record low of 1.9 months set in December 2020 and January 2021.  That record will be tested next month.

We will probably see inventory at a new record low over the Winter. Inventory is currently at 1.11 million (according to the NAR), and the record low was 1.03 million in January and February of 2021.

An additional items keeping home supply off the market, has been Boomers not selling. Baby boomers account for about 44% of America's housing wealth despite only making up 28% of the adult population.  Boomers are not moving and downsizing, which would typically create inventory. Those that do want to downsize are competing for the same low inventory starter homes that Millennials want, so Boomers are just staying put. The Boomers born between 1946-1964 are now turning 75 and are much healthier than prior generations. Based on historical data, we should see some relief as the baby boomers start hitting their 80’s in the next 5-10 years and begin selling their homes.


RE_Figure 1A

Figure 1A


Figure 1B


Housing Demand

Current Housing Demand that is said to be "slowing"  can be best explained with the two phrases "4 + 4" and “Big is Back.”  In this "slowing" real estate market sellers are still seeing 4 offers in 4 weeks. According to the California Association of Realtors, homes in California are on the market for about 21 days before starting the closing process, with 70% of homes selling above the listing price. This is the exact opposite of the subprime housing boom. Buyers are leaving the cities and going big with more square footage. According to the 2021 Coldwell Banker Survey, more square footage was the number one amenity buyers wanted in 2021. Purchases of luxury homes in the U.S. surged 41.5% year-over-year in the third quarter, while purchases of the most affordable homes decreased by 4.8% and affordable homes decreased by 4.2%. By comparison, purchases of homes in other price tiers increased between 3% and 20%, according to Redfin. One of the largest surges in luxury homes is located in San Diego, CA, where demand for homes over $5 million jumped an amazing 111.2% (attached) The next large wave of millennial buyers are now aging into their prime buying years, followed by a smaller wave (Figure 2b). The current demand is from the Baby Boomers' adult children as some are just moving out of their parents' homes (finally at 30!). "Compared to their younger generational peers, they have a higher savings rate, and are more likely to own homes and have kids - a sign that many have recovered from the financial fallout," according to Insider. Millennials have comparatively less student loan debt than their younger peers (Figure 2), a factor to the Goldman Sachs Housing Crash Index (See Figure 6). A factor particularly influential on the demand for housing is household formation, of which young adults play a key role. According to the latest data published by the Pew Research Center, a majority of young adults live with their parents now, for the first time since the last depression. Current population survey data by the Census Bureau indicates that the number of household formations declined by over 100,000 in 2020, “If all the missing households from 2020 were to be formed in 2021, we could expect about 2.3 million additional households formed this year.” Signed contracts to buy existing homes decreased by 2.3% in September compared to August. sales are believed to have dropped due to high mortgage rate increases. On a month-to-month basis, sales dropped 3.5% in the Midwest, 1.8% in the South, and 1.4% in the West. In the Northeast, pending sales fell 3.2%.


Figure 2a

The saving rate was at 7.5% through 2021 compared to just 3% in 2007. Most analysts agree the US consumer will allocate this excess savings above 3% to discretionary holiday spending and/or new home purchases.   "The number of households with the accounts rose to 52.1% in 2019, from 47.1% in 2004, while the median balance increased to $5,000 from $3,000 during the period," stated Forbes in regard to savings accounts nationwide. Even today, during this housing shortage,  Formations are expected to average 1.3m and increase from 7.3m in the last decade to 8.5m in 2020-2030, fueling future demand.  This year through December 2021, millennials applied for more mortgages than any other generation .  At the current rate of demand, we now need 3-4 years of accelerated new home starts just to catch up with the group of aging Millennials increasing new home formations (Blue Line Chart 2b & 2c).



Figure 2b



Figure 2c

Large banks have additional capital to lend as they reverse the billions in loan loss reserves for a housing crisis that did not happen. Also, with mortgage rates rising, there is a better financial incentive to lend, as loans are more profitable as rates rise (increased NIM). As rates rise and as buyers overcome lending standards, many cash home buyers are getting funds from securitized non real estate loans (secured by cash, stocks and bonds) with an interest rate of 2.5% to buy homes for cash. While there is concern that rising fixed 30-year rates will slow down the buyer, there is relief with the 5/1 adjustable loans. You can still get a 5/1 which is fixed for 5 years at 3%, which will still make buying affordable even if 30 year fixed rates go up to 5%. Further expansion in more available financing is slowly becoming more flexible. For example, there is now more financing for buyers with credit scores below 700, more financing based on assets rather than income, and underwriters allow house flipper financing.

Another tailwind pushing demand for higher end homes near the coasts is the foreign buyer coming back. For the last 20 months buyers from Europe, China, Brazil, and India were not able to enter the U.S to look at homes.  The wealthy overseas buyers are cash buyers and are not affected by higher mortgage rates. Sales data suggests the wave of overseas buyers could generate tens of billions of dollars in added sales. Foreign buyers who want on the coast, spent $267 billion on U.S. real-estate in 2018 and $183 billion in 2019, before the pandemic, according to the National Association of Realtors.  In 2021, their spending fell to $107 billion, suggesting large pent-up demand as buyers weren’t able to tour or visit properties.

Replacement/Reproduction Costs

One of the most searched word on the Internet is the word "Inflation".  It is no wonder it is searched as Inflation hit a 39 year high in December 2021.   As inflation increases, it increases the costs to build a home thus raising home prices.  Replacement/Reproduction Costs rose drastically through the pandemic as supply chain costs,  government regulation, new "greener" requirements, and permit processes increased the cost of land and construction. These costs have recently begun stabilizing. Inflation is hitting wages as builders cannot find enough workers, forcing builders to face increased cost of construction, with construction cost prices being 21.1% higher overall than a year ago, per Chain Store Age. Additionally, American builders have grown frustrated, as bottlenecks in material supply chains continue to delay construction projects. Rick Palacios Jr. on Twitter referenced that San Diego Builders have to raise prices to keep up with inflation  “There hasn’t been an elevating cost environment like this for ~40 years.  Anyone who says otherwise is delusional. If home price increases were less it would be brutal.”


"Construction input prices are 21.1% higher

than in October 2020"


As inflation continues to increase, replacement costs rise, lack of land, cost of land, and labor prices increase, home prices will rise on new and existing homes or builders will not build.

What we are seeing is costs increase on the regulatory level as well, which increases the replacement costs of housing units. Everyone wants a sustainable home but the fact is sustainable and solar improved homes are very expensive. A recent study from the NAHB found that regulations imposed by all levels of government on new homes account for $93,870, or 23.8%, of the current average sales price ($397,300). This increases costs and pushes developers to build more expensive homes and less starter homes. Regulatory costs can be absorbed easier on a more expensive property.



Housing affordability is indicated using three (3) key metrics, home prices, interest rates, and wages, put into a single number. Based on the Index put out by First American homes are more affordable today than in 2006  According to NAR., a typical mortgage payment for a median-priced U.S. single-family existing home made up 17% of the median family income in the third quarter of 2021. That’s down from about 23% in 1990, when many baby boomers were in their late 20s and 30s.

If we look back at the index is tells us why. During the early ‘80s, when baby boomers were buying homes they were very unaffordable due to the very high mortgage rates. During the 2006 housing bubble, houses were also less affordable using 30 year mortgage rates, however, during the bubble, there were many “affordability products” that allowed borrowers to be qualified at the teaser rate (usually around 1%) that made houses seem more affordable. 

Also, another index the Calculated Risk Affordability Index (CRAI) shows that homes are more affordable than they were in the 2006 bubble (See Figure 8). Their data also suggests that the affordability index has been moving sideways and that homes are still at a reasonably affordable price

Multiple of Income and Rents

One of the multiple metrics for home prices, Price-to-Wage, has seen an increase in the past few months up to the 2006 levels (See Figure 7 below). However, the current 30 year mortgage rates are at 3.14%, which is half of the rate during the 2006 bubble. This information, combined with the 5% increase in median income in 2021, suggests that affordability of housing is still better off than the 2006 housing bubble as discussed above.

The Price-to-Rent indicator, shows that we are slightly elevated. The Case-Shiller National index and Composite 20 House Price Indexes have picked up recently, moving the price-to-rent ratio upwards.  However, renters in the index with the best timing signed their one-year leases in Q4 2020 when rents were at their lowest point, locking in low rates for the next 12 months.  Increases from the low of 2020 may see 20% -30% increases when these leases come due this month. The graph below shows we are elevated on a price to rent ratio (See Figure 5 below). .

Over the course of calendar year 2021, the national median rent increased by a staggering 17.8 percent. To put that in context, annual rent growth averaged just 2.3 percent in the pre-pandemic years from 2017-2019. This recent increase in rental prices is bringing the price-to-rent multiple back in line. This is reinforced by Goldman Sachs' prediction of low probability of a crash in the next two years (Figure 6). 

Rental occupancy nationally was recorded at 97.3%,   As current leases expire, rents will go up.  As rents continue to increase and mortgage rates remain low, First American reports that “House-Buying power, how much one can buy based on changes in income and interest rates, increased by 3.5 percent in October compared with a year ago.”

To afford homes, buyers are buying with friends and family.  The number of co-buyers with different last names increased by 771% between 2014 and 2021, according to data from real-estate analytics firm Attom Data.  Among all age groups during the early pandemic months—April to June 2020—11% of buyers purchased as an unmarried couple and 3% as “other” (essentially, roommates). Those numbers were up from 9% and 2%, respectively, in the previous year. Unmarried couples and friends are buying together. Even though nominal house prices are significantly over that of the housing boom peak, real house-buying power adjusted house prices remain 37.5% below the 2006 market peak. Since the 2006 boom in unadjusted prices, the average 30-year fixed mortgage rate fell by around 3.3 percentage points, from 6.32% to 2.98%. Over the same period, nominal household income increased by 55%, contributing to the 129% higher house-buying power in June, compared to 2006.


chart 1

Figure 3




RE_Figure 4

Figure 4 




Figure 5


Housing decline probability 072321

Figure 6


Figure 7


Figure 8


The Bottom Line

The bottom line is to watch the Supply(most important) , Affordability, Multiples of Rent/Income, and Demand. If the NAR Affordability Index drops below 120 nationally or rents and income do not rise, then we see price growth slowing and inventories rising.  When housing supply (Inventory) starts to increase, look for the spike similar to what we saw in late 2006/2007 (Figure 1b).

Look for changes around the following:

1. Most important is to watch closely for the potential pivot to excess supply spike in 2-5 years as we always overshoot in both directions.
2. Look for rental price increases as current leases expire into 2022
3. Affordability and Multiples of rent/income getting closer to 2007 highs. Look for higher rates, rental price increases and whether incomes increase
4.Big city workers will be coming back in Jan 2022 which will increase rents in larger cities. The longer the pandemic the longer new habits will become the norm. The Hybrid (home and office) worker will continue with the trend toward remote working, online shopping and home entertainment continuing.

5. Watch demand led by the following:

  • Demand from Millennials will be favorable for home selling for the next few years as seen in Figure 2 on page 9. Demand from the 31-41 generation(Millennials) and in the next five years from older Gen-Z of buyers is much stronger than the future supply coming from the 56-75 year old baby boomers downsizing or moving into retirement communities.
  • Watch mortgage rates as they are on their way up. Also remember the very powerful FOMO (Fear Of Missing Out) emotion as rates rise. When rates first start increasing past 4%, buyers will want to get on the housing train before they potentially miss the train and no longer qualify.


This is Not the 2007 Housing Bubble” The Retirement Group, 25 April. 2021, https://theretirementgroup.com/


















































Disclosure: Securities offered through FSC Securities Corporation (FSC) member FINRA/SIPC. Investment advisory services offered through The Retirement Group, LLC. FSC is separately owned and other entities and/or marketing names, products or services referenced here are independent of FSC. Office of Supervisory Jurisdiction: 5414 Oberlin Dr #220, San Diego CA 92121 six

John Jastremski

Written by John Jastremski