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Are We in Another Housing Bubble in 2022?

Updated: Jan 3

Are we in another housing bubble? Are home prices too high? Are people overreacting to recent data on the state of the housing market, or are these signs that it's time to get out before things get worse? This blog post will give you some insights about how to determine technically if it is the right time to reduce some exposure in the housing market.


Some real estate experts believe that the housing market will continue to grow in 2022 but not at the same pace it did in 2021 because of the rising interest rates. Due to the supply chain issues caused by pandemic Covid, there is a severe shortage of homes and demand is very very high than the supply available. Real estate experts also believe that banks have been much careful in approving the loans unlike in 2008 and real estate is the best place to park the hard-earned money to beat the rising inflation caused by Fed's excessive money printing.


On the other hand, some skeptics believe that wages have not increased as expected due to the Fed buying back program and the rise in home prices is not sustainable. Also, generally, the stock market has been going up astronomically for the past few years whereas productivity and availability have gone down due to supply chain issues. Skeptics believe It is time for at least a 20% market crash that includes even home prices.


So, who is correct? At TechieInvestor, we truly believe in technical analysis and the numbers would reflect what would happen before it happens. So, how do we know if we are getting into a housing bubble technically?



Photo by Curtis Adams from Pexels


Before we get into the analysis, I believe real estate is the best investment for passive income and wealth generation if you know how to invest in real estate. It is worth spending some time learning how to analyze the numbers before investing in real estate for the long term ( 5-10 years). Also, the numbers will not be the same for all the markets and there will always be opportunities in some markets. In this post, we will look at how to analyze if it is a good time to buy in an individual market. Single-family homes in a particular market can be used as a yardstick to measure the strength of the market


Analysis

In real estate, the affordability of the housing market is determined by an indicator called Housing Affordability Index (HAI). Many states release these numbers quarterly. For example, Texas Housing Affordability Index (THAI) data is released a month after the respective quarter. so, let us look at how HAI is calculated.


Inputs

  1. Median household income in the market

  2. Median Home price in the market

  3. Interest rates

  4. Property taxes

  5. Insurance

Formula

HAI= (MedianHouseHoldIncome/QualifyingIncome)*100


So what is qualifying income? Qualifying income takes into account that the household interested in purchasing a home should be able to do 20% down and 25% of their income should be equal or greater than the mortgage expenses. Qualifying income can be calculated as


Qualifying income = mortgage escrow payment * 12*4


If HAI is greater than 100, it indicates that households in the area can more than afford the homes and if it is less than 100, households in the area are finding it difficult to afford the payments for their homes and if it is equal to 100, the income is barely enough to manage the payments.


I have seen some real estate experts calculate HAI as the ratio of just median household income and median home price in the area without considering the interest rates.

HAI = (medianHouseHoldIncome/MedianHomePrice)*100

As per this formula, it is nice to have HAI greater than 25. Affordability is bad when the HAI goes below 15.


Scenarios

Let us consider 5 popular cities - Frisco, TX, Tampa, FL Cincinnati, OH, Fremont, CA, and Bellvue, WA. I am using median household income published by worldpopulationreview and median home prices published at realtor.com. We will assume Insurance as 100$ per month for all cities ( It could be less or more).


Frisco, TX

Median Household Income: 153,704

Median Home Price: 600K

Property Tax: 1.94

Interest rate: 3.7%

Insurance: 1200

Qualifying Income: 157296

Down payment: 120K

HAI on average according to the first formula is 97

HAI on average according to the second formula is 25.6.


Tampa, FL

Median Household Income: 87818

Median Home Price: 355000

Property Tax: 1.82

Interest rate: 3.7%

Insurance: 1200

Qualifying Income: 93668

Down payment: 71K

HAI on average according to the first formula is 93.7

HAI on average according to the second formula is 24.3


Cincinnati, OH

Median Household Income: 65213

Median Home Price: 220K

Property Tax: 1.82

Interest rate: 3.7%

Insurance: 1200

Qualifying Income: 59944

Down payment: 44k

HAI on average according to the first formula is 108

HAI on average according to the second formula is 29.6


Fremont, CA

Median Household Income: 160,528

Median Home Price: 1.2M

Property Tax: 0.78

Interest rate: 3.94

Insurance: 1200

Qualifying Income: 260832

Down payment: 240K

HAI on average according to the first formula is 61.5

HAI on average according to the second formula is 13.3


Bellvue, WA

Median Household Income: 162,434

Median Home Price: 1.3M

Property Tax: 0.93

Interest rate: 3.45

Insurance: 1200

Qualifying Income: 276024

Down payment: 260K

HAI on average according to the first formula is 58.8

HAI on average according to the second formula is 12.4

From the examples above, Cincinnati is the most affordable market. Bellvue and Fremont are most prone to crash as their housing affordability indexes are so low. Tampa, FL, and Frisco, TX are heating up and the prices seem to be a little ahead of the wages.


Final Thoughts

we will see inflation levels rising in 2022 and real estate is one of the best places to park our hard-earned savings to beat inflation. However, we need to be cautious and invest in markets that are not heated up and are more prone to crash. HAI gives us a clear indication of an area's affordability and hence helps you decide on investing in an area.


I believe that numbers such as HAI will give you insights into markets. However, if you are an investor, you need to understand how to invest in real estate by looking at other indicators such as the 50% rule and cash on cash return, etc.


Happy Investing !!


Crypto is another asset class that we can invest to diversify. If you like this post, you might also like how to invest in crypto to understand the various crypto types available currently, what to invest and how to invest.


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