Published March 25, 2022

OKC Real Estate - Is This a Bubble?

Written by Ryan Hukill

OKC Real Estate - Is This a Bubble? header image.

I'm going to attempt to address a term that gets thrown around A LOT these days. It's a term that strikes fear in some people, causing them to sit on the sidelines while home prices continue to rise, right along with interest rates.

The term? BUBBLE.

We can talk later about how rising interest rates are actually the bigger enemy, but if you have questions, feel free to call or text anytime (405-477-1881).

To give credit where credit is due, much of the data & charts I'm sharing here came straight from Keeping Current Matters.

So, are we in a housing bubble?

While I understand the fears that come from what many experienced in the early 2000s, comparing today's market to that simply isn't accurate. It's based in fear.

What's different today?

a: HOUSING SUPPLY

Last year, home values appreciated an average of 15% across the nation. And while this year’s growth isn’t expected to match it, buyers and sellers are still worried that home prices are too high and that depreciation is likely to follow.

However, unlike the Housing Bubble years of the early 2000s, the major factor driving up home values now is, very simply, a supply shortage. In fact, we’re in a dire inventory shortage. In other words, there just aren't enough homes for people to buy.

A balanced real estate market (even, not in favor of the buyer or the seller) is widely considered one with about 6 months of inventory. At the time of this posting, the Oklahoma City metro area inventory is at only about 15 days, meaning that if homes continue to sell at the current pace, and no other homes are listed, we'll be completely out of homes to buy in only 15 days! Yep, barely over 2 weeks.

By comparison, from 2005 to 2007 inventory levels rose from 5 months to 11 months, a vast over-supply of homes that didn't warrant the price appreciation that was occurring.

So, throwing it back to your high school economics class, the biggest driver of price appreciation is a simple case of supply and demand, hence what we’re seeing in the market today.

b: HOUSING DEMAND

If you remember the housing boom of that time, you know how crazy it was. But if Robert Schiller, a fellow at the Yale School of Management’s International Center for Finance, could sum it up in one phrase, it’s this: irrational exuberance.

In other words, the buying and selling frenzy that contributed to the market collapse was fueled not by tactful, financial decisions but a country-wide case of FOMO (fear of missing out).

The mortgage industry fed into the frenzy by making it easy for people to obtain home loans much higher than they could reasonably afford. Balloon notes, adjustable-rate mortgages, and other high-risk products, coupled with widespread economic ignorance, were the main driver of this frenzy.

Today’s real estate demand, however, is a very real thing, and lending standards have become much tighter than they were before the crash.

Plus, with rent rates escalating across the US, many Americans are opting for the financial stability that home ownership offers. Have I mentioned that Millennials have come of age and are finally jumping into home ownership also? That's a topic for another day.

These factors, coupled with low mortgage rates, make purchasing a home today a good financial decision, so the bandwagon is overflowing.

c: EQUITY

Following the housing and economic crash of 2008, economists, financiers, and real estate industry experts have combed through data to figure out why the entire system crumbled the way it did.

Most will agree that one of the biggest pieces of that catastrophic equation came down to equity. Or in reality, the lack of equity.

The mid to late part of the decade saw a massive wave of homeowners cashing out the equity in their homes. Cash-out refis and HELOCS were all the rage. Basically, many homeowners were using their homes like ATMs to finance some of the finer things in life. On a sidenote, taking the equity from an appreciating asset to buy depreciating assets is never advisable.

Anyway, this led to a lot of negative equity situations, where the amount someone owed on their home was far more than what their house could sell for, especially when home values started dropping because of the oversupply mentioned above. Many foreclosures and short-sales followed, dramatically depreciating home values nationwide.

Today's equity picture is much different. Cash-out refinance volume over the last three years is less than a third of what it was during the three years leading up to the crash. Plus, the escalating appreciation we see recently has resulted in homeowners gaining an average of $56,700 in equity in 2021 alone. As prices continue to rise, equity does too (While we're on the subject, why not find out how much your Oklahoma home value/equity has risen this year?)

This positive equity perspective puts the current housing market in a much stronger place that we all remember in the early 2000s, minimizing risk of foreclosure and stabilizing home values across the US.