Will there be a real estate bubble soon?

August 14, 2020 at 12:17 pm Leave a comment

Arizona’s real estate market surged before and during the pandemic, with an average 8-to-10-percent increase in home values over the past five years. According to Core Logic Case-Shiller U.S. National Home Price NSA Index, Phoenix leads the nation in home appreciation. But what happens after Coronavirus subsides? Will there be a real estate bubble?

In a recent webinar, Dr. Lawrence Yun, Chief Economist and Senior Vice President of Research for the National Association of Realtors, said he believes the real estate situation during Coronavirus is not the same situation as the real estate bubble in 2016 which makes him to conclude that a “bubble” is far from reality.

The following are reasons why the pandemic will not likely bring about a bubble:

  1. There is NO sub-prime lending. Borrowers are qualified to borrow a loan.
  2. Arizona has had 10 straight years of economic expansion since 2010.
  3. Job losses are temporary. Once the pandemic is contained or a vaccine is discovered, those jobs will return – examples include retail, travel, dining, entertainment, health and fitness.
  4. Arizona real estate is well positioned to face any downturn because unlike New York, which had a long lockdown, and Nevada which relies on travel and entertainment, Arizona’s economy and businesses continued.
  5. Many people’s income increased during the pandemic due to the stimulus package. Many of these people placed their money in savings. This means there is potential for spending power that will be unleashed after the pandemic and will drive the economy back up quickly.
  6. Unlike the 2016 bubble, new home builders are scaling back during the pandemic. There is no overbuilding of homes.

Other insights from Dr. Yun’s webinar:

  1. The work from home phenomenon is real and lasting. People find value in owning a home. Many first-time home buyers are looking to buy a home. More people will find living in suburban areas more attractive than in downtown. Big tech companies like Twitter have announced they will allow employees to work from home forever. Facebook is also allowing half of their work force to work at home. Smaller businesses will soon follow this lead.
  2. Commercial real estate is hurting. Customers and workers are staying home.
  3. Mortgage applications increased by 20 percent compared to last year. There is a long pipeline of buyers who are waiting to get into a home.
  4. Homes under contract have increased 30 percent compared to last year.
  5. The United States is fortunate that the U.S. dollar is accepted in any part of the world. That’s why it can get away with $4 trillion in new debt. The Federal Reserve in Washington is buying the U.S. debt. However, five to seven years from now inflation may occur. The best defense against inflation is gold and real estate. Real estate appreciates and you will have earned equity on the property. So, if you have money in savings and have a good steady job, Dr. Yun believes this is a golden opportunity to purchase a home while interest rates are at historic lows.
  6. he outcome of the presidential election will not dramatically change the real estate climate. It will affect the higher income class more than the middle class due to changes in tax system.

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