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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The home Real Estate market has been appreciating dramatically through the pandemic and into late 2021; 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."

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

CNBC recently reported that in August "The 10-City composite rose 18.6%, down from 19.2% increase in the previous month" and "The 20-City composite was up 19.7%, down from 20% increase in the previous month." According to the S&P CoreLogic Case-Shiller Index report, Phoenix led the way with a 33.3% year-over-year price increase, followed by San Diego with a 26.2% rise. 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.

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, "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 $1 trillion. Additionally, mortgage debt has decreased significantly, standing at 46.1% of the GDP, from 73.3% during the housing bubble.

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. 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 three 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"


These supply numbers may be even worse, as many reports include pending home sales in the NAR supply numbers which makes the supply look larger than the real supply numbers .

Todays supply numbers are due to 10 years of low new home starts, 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

This 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 (Figure 1B). 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. Private housing units given
building permits in October approached a seasonally-adjusted rate of 1,650,000. This figure is 4.0% above the September rate of 1,586,000, and 3.4% higher than the October 2020 figure of 1,595,000. Data shows the share of homes authorized but not yet started surged in October 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 0.7% in October to

1.52 million rate


Taking additional supply off the market, has been rentals. "Rents for single-family homes increased 10.2 percent year-over-year across the U.S. in September, the highest such increase recorded since at least 2005 and a sharp uptick from the 2.6 percent increase in September 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

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" market sellers are sill 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 108.5% (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 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. 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.

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

Replacement/Reproduction Costs rose drastically through the pandemic as 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.


"Construction input prices are 21.1% higher

than in October 2020"


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. Everyone wants a sustainable home but the fact is sustainable and solar improved homes are 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.


Affordability and Multiple of Income

Housing affordability is indicated using three (3) key metrics, home prices, 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

If we look back at the index is tells us why.  During the early ‘80s, homes 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.

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 150.9 in September. 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 .40% in October, 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 will see rents rising to market price(See Corelogic). 


Multiple of Income and Rents

U.S. single-family rent growth increased 10.2% in September 2021, the fastest year-over-year increase in over 16 years, according to the CoreLogic Single-Family Rent Index (SFRI). The index measures rent changes among single-family rental homes, including condominiums, using a repeat-rent analysis to measure the same rental properties over time. The September 2021 increase was about four times the September 2020 increase, and while the index growth slowed last summer, rent growth is running well above pre-pandemic levels when compared with 2019. 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%, (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.  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 



RE_Figure 5

Figure 5


Housing decline probability 072321

Figure 6


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 2-3 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 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 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 30-40 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

John Jastremski

Written by John Jastremski