Summer’s Real Estate Boom: A Bubble or A Trend

This past May, 3,674 homes were sold in metro Detroit, a 137% boost from 1,545 home sales in May 2020, according to the May 2021 housing report from RE/MAX of Southeastern Michigan in Troy. It’s just one of the cities across Metro Detroit that witnessed a real estate boom this summer, leaving observers to wonder if the increase is a long-term trend or a pandemic-induced bubble.

Continuing to look at reports from this past May, Oakland County had the highest percentage jump from last year, at 171%. Livingston County more than doubled its number to 223 (120%), Macomb County did the same with 534 homes sold (111%), and Detroit saw 320 home sales compared to last year’s 187 (71%).

“As we looked ahead to the next three months, we anticipated similar market conditions with relatively low-interest rates and inventory which would keep homes moving quickly,” says Jessica Boutros, Mortgage Specialist at TD.

Experts point to the low inventory of homes for sale to explain an increase in prices, with little on the horizon to provide much hope for a change in conditions. “New construction is one way to add to the inventory, but that’s just starting to heat up and will take months before it has a significant effect on inventory,” says Michael Donelson, Associate Broker with Realty Executives. “Demand will be high for a while because Millennials need houses. Prices will keep rising for a while because inventory is so low.”

“The main cause for the current housing demand is low mortgage rates,” says Boutros, “In January 2020, meaning pre-pandemic, the fixed-rate mortgage rate was, I believe, over 3.5%, but by September of this year, that rate has dropped below 3%.”

Boutros’ estimate is correct. At the start of the pandemic, in March 2020, the 30-year fixed-rate mortgage rate sat at 3.45%, but by August of this year, that number had dropped to 2.84%.​​ “We will see more prospective homebuyers being priced out of the market as prices go up,” adds Donelson.

So, are we foreseeing another housing bubble? Economists are watching closely after the last major housing decline generated a global financial crisis. There’s one very big difference between then and now, though says Donelson. “Mortgage loans are much harder to get.” The mortgage credit availability index reached almost 870 in June 2006. This August it was just 123.7. Lenders have raised standards even beyond the requirements of the Dodd-Frank Act of 2010, which was passed in response to the financial crisis. Donelson says that now, “loans are smaller in proportion to house values and borrowers’ income. Borrowers’ average credit scores are higher. You can’t bluff your way into homeownership with a no-doc or low-doc loan — one that allows you to attest to your creditworthiness without providing full documentation.”

Now after booming for more than a year, with bidding wars sweeping through communities, the housing market is finally cooling off a little. According to the September 2021 housing report from RE/MAX of Southeastern Michigan in Troy, year-over-year homes sales are down for the third consecutive month, which indicated the market is returning to traditional seasonal trends entering the fall months.

Last September, there were 4,553 home sales compared to 4,182 this September, marking an 8.1% drop. In August, 4,196 homes were sold, which is a comparatively smaller drop, coming in at around 1%.

“There's seasonality in real estate, this slowing that occurs annually as summer vacations pick up and students return to school,” says Donelson, on why the housing market is calming down. "The housing market was too hot for its own good over the past year, and we’ve seen some buyers hit an invisible price ceiling," Boutros says. “Along with that, we’re seeing more resistance from homebuyers.”

As we move through November, it’s clear the housing markets are rebalancing, as evidenced by a steady pace of transactions and more moderate price growth. As more homeowners list their homes for sale, these homes remain on the market for longer periods of time.

This buyer hesitation was expected, but cooling doesn't mean home prices will fall. "Many homes are still selling just as quickly as they hit the market," Donelson says. "The difference now is that there’s been a slight softening in the number of homes encountering a bidding war or selling above the asking price […] some homes are now selling below the asked price."

As the economy recovers from the pandemic, the Federal Reserve has indicated that it will keep interest rates low to encourage economic growth. Once the economy is in a more secure and stable position, the Federal Reserve will likely increase interest rates gradually to keep the economy from overheating and prevent overinflation.