Many fear that a real estate bubble is upon us, a bubble sure to burst soon. But are such fears justified?
According to OMCAR, our local board of Realtors, Ocala housing saw astounding appreciation year over year as of February, 2022. In fact, appreciation exceeded 40% during that time interval. As a result, rents also soared and many were left out, fearing they could no longer afford to live in our community. Surely rapidly declining housing affordability and record appreciation signal the creation of a real estate bubble. A collapse is just around the corner, correct? We’ve felt the impact of such bubbles before, and this market is strongly signalling that yet another is threatening our local economy, right?
Actually, I think that is quite unlikely! Let me explain the significant differences I see between the current real estate market and the last which devolved into an economy crushing bubble.
The Sub Prime Real Estate Bubble
The most recent real estate bubble to collapse upon our economy was the subprime crisis. While politicians blamed financial institutions, the answer lay much closer to home. For years Congress focused on making the American dream available to all, whether they could afford it or not. Lenders faced pressure to make loans available to everyone. However, financial institutions are for profit organizations and their managements are beholden to their shareholders. Therefore, their fiduciary duties prevented them from offering loans that put their companies at more risk than would be prudent.
So our legislators devised a creative solution. They passed new legislation which permitted lenders to bundle mortgages into financial instruments and sell them. Of course, these instruments transferred the risk of loan default to the investors who purchased them. Therefore, banks and other lenders could lend to one and all. They could approve every loan that crossed their desks, since they would no longer be impacted if borrowers defaulted. Our government had opened the henhouse and invited the foxes in. Additionally, it assured them that once they had their fill, they would be allowed to leave safely. No-one would pursue them.
To be sure, unqualified borrowers eventually defaulted in droves and brought our economy down in the process. But the foxes and Congress learned from their mistakes. The foxes, better known as lenders, realized that regardless of how they packaged loans, they could not avoid risk. Additionally, legislators realized that if they continued to encourage irresponsible lending, their constituents would hold them to account. Therefore, Congress passed new laws which fostered responsible lending practices and lenders implemented them.
So we as a nation learned that there are no free lunches, and today our financial sector is much stronger for it.
Real Estate Bubble or Supply and Demand
Now let’s analyze why we have seen extraordinary demand over the last year and a half. The economic forces at work here are supply and demand.
During the first year or two of the pandemic, we faced shutdowns and our lives were impacted by great fear. But in response to the economic effect of the pandemic, interest rates were allowed to drop precipitously. As a result, they reached a level not seen in many decades. Of course, these new low rates made homes much more affordable and released a flood of pent up demand. Simultaneously, the inventory of homes listed for sale shrank to historic lows. Therefore, it is not unusual that prices of homes spiraled upward. To be sure, Economics 101 teaches us that when supply and demand are not in balance, the market will react. When many buyers want the same house, we expect that they will bid its price up.
The Forces That Caused the Imbalance Are Still With Ocala
Now that interest rates are climbing, will the equation reverse? Will supply exceed demand before long? That is unlikely. Our State continues to grow at an unprecedented rate, as more and more northerners choose to migrate south. When they arrive, they demand housing. Additionally, the World Equestrian Center is creating jobs and causing an expansion of infrastructure needed to support its operation. Of course, this expansion is creating even more jobs. As people arrive to fill these jobs, they all demand housing. So clearly, the demand for housing in our community is growing and will for many years to come. But while it is expanding, the supply of listings is increasing at a much slower rate, if at all. Therefore, demand for homes greatly exceeds supply, and is expected to for the foreseeable future.
Of course, the shortage of affordable housing is a problem we discussed in a previous post. Since local governments and private enterprises recognize that they must provide a solution if the needs of the WEC and our growing infrastructure are to be met, we have reason to believe they will urgently work to do so.
First, let me note that my crystal ball malfunctioned some time ago and it appears that all the crystal ball repair shops have closed due to the pandemic. Therefore, my ability to predict the future is greatly diminished. However, I have earned my living in real estate for several decades, and based on my experiences, I believe that a bubble-like collapse of our real estate market is unlikely. Instead, I expect our Ocala economy to thrive for some time to come.
Below are three articles that will educate you as to how others see the local, state and national real estate markets. Enjoy reading, but consider that the malfunctioning of crystal balls appears to be a national complaint:
There may not be a nationwide housing bubble, but specific metro areas in Texas, Idaho, and Florida could have inflated prices, a real estate expert warns. Learn more here: GROW FROM ACORNS + CNBC | GABRIEL CORTÉS
What are the housing market predictions for 2022, 2023, 2024, and 2025? Readers frequently ask this question. Everybody is talking about housing, but how is the market doing? Is the housing market ascending or is it on the decline? If you’re wondering … Continue reading on Housing Market Predictions 2022 to 2025: Crash or Boom?
In this ultimate guide to the housing market, expert real estate investor, Kathy Fettke, shares over 28 housing market predictions for the years 2022, 2023, 2024, 2025 and 2026. She also answers one of the biggest questions investors ask every year: Will the housing market crash? And if so, when? Learn more on REALWEALTH.
“The best investment on Earth is earth.” – Louis Glickman, American Business Executive
Opportunities like the one created by the opening of the World Equestrian Center are rare indeed. But when one comes along, the wise see it as a godsend and go along for the ride. There is no better time to invest in Ocala than now, and the place to start is by owning the real estate you call home, whether it is your first house, your dream home, or a stepping stone from one to the other.
Andrew Kruglanski, MBA, ABD, Broker