The Real Estate market has been appreciating dramatically through the pandemic; The Federal Reserve's latest findings show that, within the first three months of this year, net worth for U.S. households rose by $960 billion solely based on the value of real estate owned." CNBC recently reported that "The 10-City composite rose 18.5%, up from 16.6% in the previous month" and "The 20-City composite was up 19.1%, up from 17.1% in the previous month." According to the S&P CoreLogic Case-Shiller Index report, Phoenix, San Diego, and Seattle reported the highest year-over-year gains. This brings back the large concern that we are in another 2007 housing bubble.

"Prices are now 41% higher than their last peak during the housing boom in 2006" 

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.


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 short 4 million homes.

3. Demand dropped off in 2007 versus today’s market, where demand is high and there are more buyers than baby boomers selling.

4. Replacement Costs are a floor of value and currently the cost to reproduce a home is rising.

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. According to National Mortgage Professionals, "The amount of equity available for homeowners with mortgages to borrow against while still retaining at least 20% equity in their homes spiked dramatically in the second quarter of 2021 to a total of $9.1 trillion." If we compare this to the 2007 Bubble, home equity was just $13 trillion and debt was $12 trillion.

The increase in home prices boosted the amount of home equity for the average homeowner  to more than $173,000. This 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.

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. The fact that home foreclosure starts are up 45% from a year ago, and that the moratorium on foreclosures expired, have been contributors in keeping supply low by keeping inventory off the market. The 600,000 homes off the market may continue to see appreciation and increased equity. As these foreclosures hit the low supply market through the summer, equity could be higher and many of these distressed homeowners may have enough equity to renegotiate a new loan. Any remaining foreclosures hitting the market 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 the International Business Times, recent Government data shows that "new single-family projects fell 4.5 percent and construction started on apartments dropped 13.6 percent." According to Zonda’s Lot Supply Index, we now see nationally, available lots have hit an all time low, down 34.8% year-over-year, with San Diego and LA at the bottom.


"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"


These supply numbers may be even worse, as many reports include pending home sales in the NAR supply numbers. For example, when looking at NAR in January, the NAR is reporting that inventory was down 25.7%. shows that active listings decreased 24% through the end of August. The drop in supply today is due to a low new home starts for 10 years, pandemic shift from cities, record low mortgage rates, a move away from multi-family rentals, single family homes, second home buying, and now cost of materials have stifled new home starts. 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. Home prices in July had an annual gain of 17.8%; 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 (Figure 1B). 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. Private housing units given building permits in July approached a seasonally-adjusted rate of 1,635,000. This figure is 2.6% above the June rate of 1,594,000, and 6% higher than the July 2020 figure of 1,542,000. Data shows the share of homes authorized but not yet started surged in July to the highest level recorded in 15 years. 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 7% in July to 1.53 million rate


Taking additional supply off the market, has been rentals. "Rents for single-family homes increased 7.5 percent year-over-year across the U.S. in June, the highest such increase recorded since at least 2005 and a sharp uptick from the 1.4 percent increase in June 2020," according to CoreLogic, a housing data provider. At the same time, housing starts dropped while many of these investor-owned rental conversions were bought by institutions and individual investors. These homes were first time home buyer properties, which took that supply off the market. Second, "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 they 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


Residential-Inventory-MeasuresFigure 1C

Housing Demand

Housing Demand can be best explained with the two phrases "4 + 4" and “Big is Back.” Sellers are seeing 4 offers in 4 days. According to the California Association of Realtors, homes in California are on the market for about 7 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 88.2% year-over-year in the second quarter, while purchases of the most affordable homes rose by 56.8%. By comparison, purchases of homes in other price tiers increased between 30% and 45%, according to the Ritz Herald. One of the largest surges in luxury homes is located in San Diego, CA, where demand for homes over $5 million jumped an amazing 140.2% (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 less student debt 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 household formations declined by over 100,000 thousand 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.”


Figure 2a


The saving rate was at 9.4% through 2021 compared to just 3% in 2007. Now this could be a problem if the US consumer does not spend, as we saw in Japan in the 1980’s; But that has never been the case, as the US consumer generally spends consistently. "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, Housing Formations of 1.3m lag New Home starts of 1.1m over the last year (Figure 2c). 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. At the current rate, 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.


Replacement/Reproduction Costs

Replacement/Reproduction Costs rose drastically through the pandemic as government regulation 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 input prices 23.1% higher overall than a year ago, per the American Surveyor. Additionally, American builders have grown frustrated, as bottlenecks in material supply chains continue to delay construction projects.


"Lumber prices currently look cheap, following a 65% plunge "


Steel rebar prices have increased half a percent and Copper rose 1%. North American lumber prices have recently stabilized after a dramatic increase in price, which largely drove up the cost of home construction through 2021. As replacement costs rise, lack of land, cost of land, and labor prices increase, home prices will rise on new and existing homes.

What we are seeing is costs increase on the regulatory level as well, which increases the replacement costs of housing units. 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.


Affordability and Multiple of Income

Housing affordability is indicated using three (3) key metrics, home prices, rates, and wages, put into a single number. Although it dipped recently it is still above the 30-year average as family incomes rose 6.8% since 2018. To put the power of income into perspective, there only needs to be a 2.4% rise in income to equal a 12% rise in housing prices if rates stay the same. In fact, with rising incomes, the NAR Affordability index hit 146 in June. On a national level, every housing downturn since 1971 happened when affordability was below 120.


A second indicator called Income to Rent, showed in 2020 that the market is 25% overvalued, but still below the 2007 bubble peak (See Figure 4 below). Incomes are rising, average hourly earnings rose .58% in July, above the trend before the pandemic started showing a trend of increased affordability.

A third indicator called the price to rent ratio shows we are better than in 2007. The graph below shows we are elevated on a price to rent ratio (See Figure 5 below). The elevated level may be at a transitory high because of the now expired eviction moratorium and renters leaving cities to buy. These two events are keeping rents low and lagging in the short term. The eviction moratorium put a temporary price freeze on all rents for a year. As these have expired, we should see rents going back to market price. The rent multiple was turbo charged (high price in relation to rent) beginning in March of 2020, when people reacting to the pandemic moved from large cities (NY, San Francisco, Chicago) causing a temporary drop in rents in major cities, while increasing prices in the suburbs.


Multiple of Income and Rents

The drop in large city rents while home prices shot up, is attributed to the temporary price to rent dispersion. Zillow recently reported that “Typical U.S. rents grew 9.2% year-over-year in July… The ZIllow Observed Rent Index (ZORI) in July was 2.9% ($52) higher than where it would have been if the last roughly 18 months had been more ‘normal’.” Surveys by the New York Fed and Fannie Mae suggest renters are braced for further hikes of 7% to 10% in the coming year. This is due to the expired moratorium, expiring leases and rental inventory decreases. If mortgage rates stay down, and rental inventory continues to decrease, causing rents to increase over the next 1-2 years, home purchases will become more favorable over rents going into 2022. 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 96.9%, (See Figure 3) and according to the National Apartment Association, rents have climbed 10% in 65 of the 150 largest metros, and at least 15% in 22 metros. As current leases expire, rents will go up. To afford higher rent payments, more people are giving up independence to afford more space. There has been a 35% increase in friends, parents, children, siblings and grandparents renting together. Approximately 15% of people who rented or bought homes between April and June of last year planned to have multiple generations living there per WSJ and NAR. That is up from 11% of those who bought between July 2019 and March 2020, and the highest level in survey data going back to mid-2012. To afford the higher rent on larger homes, Millennials are renting with friends and GenXers are creating multi-gen households by putting in-garage apartments and backyard houses for elderly parents. 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 6.8 percent in June compared with a year ago.” Even though nominal house prices are significantly over that of the housing boom peak, real house-buying power adjusted house prices remain 42% 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 



RE_Figure 5

Figure 5


Housing decline probability 072321

Figure 6


The Bottom Line

The bottom line is to watch the Affordability, Multiples of Rent/Income, Supply 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. Affordability and Multiples of rent/income getting closer to 2006 highs. Look for rental price increases and whether incomes increase.

2. Look for rental price increases as current leases expire and the moratorium expires in this summer.

3. An inventory increase from vaccinated sellers and baby boomers more comfortable listing homes and allowing potential buyers in their home.

4. The move away from big cities should slow as the drop in rents are bringing people back, at the same time companies are now requiring workers to return to office in late summer. The Hybrid (home and office) worker will continue with the trend toward remote working, online shopping and home entertainment continuing.

5. Homebuilders seeing these 2021 trends will react with new home starts as they respond to low inventories and lower lumber costs.

6. Watch closely for the potential pivot to excess supply spike in 2-3 years as we always overshoot in both directions.


Watch demand led by the following:

1. Demand from older Millennials will be favorable for home selling for the next few years as seen in Figure 2 on page 9. Demand from the 30-40 generation of buyers is much stronger than the future supply coming from the 56-75 year old baby boomers downsizing or moving into retirement communities.

2. 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,

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John Jastremski

Written by John Jastremski