The rise in property prices in the United States, which reached a new all-time high in April, triggered fears that a crisis like the one in 2008 might break out. The low supply of units for sale added to the interest of buyers looking to close a transaction before mortgage rates rise more than they already did, caused a record increase in the value of the square meter and they put on the table a question that invades those who bought properties in that country: Is the American market facing a new real estate bubble?
Before answering this dilemma, it is worth clarifying five fundamental questions when it comes to understanding what is happening in the sector
The concept of “bubble” applies to any type of asset when referring to the phenomenon that occurs when its price begins to rise rapidly and dissociated from a real foundation that can explain the increase, second need to THE NATION Federico González Rouco, economist specialized in housing. “The best-known case of recent years, and the one that serves to illustrate, was the dot-com crisis at the end of the ’90s, when a period of economic growth of companies linked to the Internet was evident.”
“Everyone began to invest in companies in that sector without a clear notion of where they were investing and what happens is that inevitably when many people are interested in allocating money in certain sectors, its values rise. This generated that there are beginning to be shares of companies trading at extremely high values without real support”, analyzes regarding that stage, which culminated in the bankruptcy of many technology firms.
Specifically in the real estate, A housing bubble is a period marked by an unusual increase in home sales prices. It is a phenomenon driven by high demand linked to strong expectations and speculation. A fact that draws the attention of the American market is that in the United States home values rose nearly 30% in the last quarter of 2021 compared to the same period of the previous year.
Some specialists consider that the US real estate market shows an “abnormal” behavior. It is that, before a scenario marked by the unstoppable increase in the value of the square meter, there are those who remember the real estate bubble that the country went through between 2006 and 2008, which caused a mortgage and stock market crisis and led to what is known as the Great Recession.
In summary, Rouco explains that, between 2001 and 2005, the US financial system deregulated the requirements to access a mortgage loan, while interest rates fell. “Many people accessed this tool without formal income and with a bad financial history. This movement strengthened the demand for housing, but the supply had not grown as much”, indicates. In this context, mortgage loans went from representing 70% of the country’s GDP in 2002 to 100% in 2008.
“When interest rates rose, many went out to sell their homes at the same time and that generated a drop in the value of the square meter,” he summarizes. “There was a bubble there: the increase in demand, which raised prices, was driven by credit. It was a crisis that culminated in four million people losing their homes and 10 million ending up owing more money than the value of their home,” he says.
After reviewing the real estate crisis that exploded in 2008, the specialist maintains that there is a key factor that makes the current situation not the same. “For there to be a bubble there has to be something fueling a price increase. Some believe that factor is that interest rates were low for a long time. However, today, mortgage credit is at similar levels -in relation to GDP- than five years ago, that is, this tool did not grow above the economy”, he maintains, although he clarifies that the US real estate market is “giant , dynamic and with a lot of turnover”, which is why he stresses that generalizing is complex.
After peaking, the bubble bursts and home prices begin to fall, usually because of rising mortgage rates or inflation, causing demand to drop. “It is called a ‘bubble’ precisely because it is masked air behind purchase intention and is punctured when the factor that fueled demand ceases to appear. It is a problem mainly for those who bought with a credit, because the acquired property becomes worth less than its debt, which means that not even selling the property can pay off the debt”, explains the economist.
In the midst of the scenario that the US market is going through, specialists believe that it is not convenient to buy. “This is not the time to think regarding that. Mortgage interest rates used to be very low and now they are up. Many people took the opportunity to buy houses because the rates were less than 5%, but today they are already above. The moment to take out the credit has already passed”, assures Rouco. At the same time, it seems that the market is slowly beginning to rearrange itself downwards.
According to Mariano Capellino, CEO of Inmsa Real Estate Investments, the real estate bubble is manifested in the rise in property prices, which have increased more than 50% in the last two years. Now, slowly, “some signs of cooling” are beginning to be seen. Among them, the specialist explains that, in recent months, regarding 17% of sellers lowered their values to be able to sell in a scenario of falling operations due to the rise in inflation and the increase in interest rates on mortgage loans.
“There are certain factors that are still supporting the market, but supply and demand are going to balance out soon. This price correction that is beginning to realize that everything was overheated”, indicates. Although he clarifies that it is difficult to generalize in such a large market. Looking to the future, he maintains that the value of the square meter might drop 20% when the bubble is punctured.
