An in-depth look at two housing bubbles and why they are different 

If the phrase “The Big Short '' sounds familiar, it is the title of an excellent movie made in 2015 which highlights four different entities who end up profiting from the 2007-2008 subprime mortgage collapse, which ultimately led to the Great Recession

Fast-forward to 2021, and real estate prices are skyrocketing again in Arizona and almost the entirety the United States. With home value increases mirroring the lead up to the economic collapse, but in half of the time. Is there cause for concern that another collapse may be on the horizon?

The short answer to these concerns is maybe. However, the contributing factors are very different. Let’s take an in-depth look into the housing bubble from 2008, why we are calling the current bubble The Big Squeeze, and what we can expect from the housing market over the next year.

The Big Short

In summary from 2006-2008:

  • Lenders were giving a mortgage to just about anyone with a pulse, disregarding income or qualifications (and often outright fabricating information on loan applications and income documents).
  • Subprime mortgage origination rose from an 8% historical to 20% of total loans from 2004-2006, which often carried adjustable mortgage rates or balloon payments due after a short introductory low rate.
  • Once adjustable mortgage rates and balloon payments began to kick-in, foreclosures went through the (figurative) roof, and the chain reaction led to bankruptcies, government bailouts, and the worst US economy since the 1920s.
  • Unemployment skyrocketed and nearly nine million individuals lost their jobs, with millions losing their homes as well.

Since these events, mortgage origination is more tightly regulated than ever to prevent another subprime mortgage bubble. But if mortgage requirements are more strict, what exactly is causing these outrageous housing shortages?

The Big Squeeze

From February 2020 to June 2021+:

  • Covid-19 brought huge uncertainty to the entire economy and general mobility came to a standstill. Causing an overall 50% reduction in available housing inventory nationwide.
  • Mortgage rates dropped by the federal government to historic lows in an attempt to keep the economy stimulated.
  • Massive shortages in construction materials, severely hampering the ability to build new homes.
  • Mass migrations from high cost-of-living areas to lower ones.

You usually hear the term “squeeze” when referring to the stock market. This can happen when there is an unusually high number of traders who are trying to short a stock and a large number of shareholders choose not to sell during the short period. Effectively creating a shortage of supply while the demand stays high, making the price increase rapidly, a great example is what happened with the GameStop Stock.

This is effectively what is happening in the current housing market. You have a large number of home buyers in the market but not nearly enough housing supply to satisfy that demand. If you mix that with the ability of individuals and investors to borrow money cheaply it essentially creates a gold rush. So who are the big winners from this development? Let’s take a look at our local Arizona market for an example.

Mass Migration

According to the Uhaul index, which tracks one way migration patterns in the US, Arizona ranked #5 for where people moved to in 2020. A trend that has continued into 2021 to the tune of 250-300 people per day. Based on Kay-Grant’s search trends: 15% of our website visitors total came from those living in Los Angeles, with 5% from Seattle being the runner up. They happen to be bringing a lot of buying power with them as well.

According to Zillow (just to keep the reporting consistent), the average single family home price in Los Angeles at the end of 2020 was $850,00 and Seattle’s was $911,000. While the average in the Phoenix area was at $388,000, all of these averages have increased dramatically as we pass the halfway point of 2021. 

There are several markets that are experiencing similar migration trends which include Tennessee, Texas, and Florida and similar price point differences. If you bring basically the purchase price of a home in equity from a sale in either Seattle or Los Angeles (or a similar high priced market) to buy a home in the Phoenix area, offering as much as 15% over the asking price for a house really isn’t that much of a strain on the pocket book if you really want/need that home. Then why are so many housing markets like California seeing the exact same trend?

Simple, because people are leaving the high priced areas like San Francisco and creating high demand elsewhere in the state. In fact if you look at historical migration trends in California they have largely remained the same year-over-year, even with a population drop which is largely attributed to the stifling of international immigration. All that said, what does the lending landscape look like? 

Lending Practices

As we stated before, the Federal Government is keeping lending rates low and planning to keep them low until 2023. For comparison the annual average rate in 2019 was 3.94% and for 2020 it was 3.11%. So far in 2021 the average is 2.93%, but this is good news right? It means that people should be able to get into homes more affordably, right?

If the market were stable then the answer would be a resounding yes! But if you have a housing market, like homes in Scottsdale Arizona, where the average single family home value has increased by 41% since Q2 of 2019 as you can see below.



This ends up costing you so much more in the long run. A 1,500 square foot home in Scottsdale in 2019 would, on average, cost $373,500. With the lending rate in 2019 you would have paid a total of $636,437 if you finished a 30 year FHA loan. That same home in 2021, even with a full percentage point less, would cost you a total of $794,227 which is $157,790 more over the life of the loan. The upside to this is those that secured a loan before the home value spike were able to refinance at a much lower rate. But what about those that are getting loans, is it anything like what happened in the great recession? No, not even close.

The average borrower quality is as high as it has ever been, with a huge portion not even needing private mortgage insurance by paying 20% or more on the value of the home. So why don’t we look at the other main factor driving this market. 

Material Shortages

With the total upset of supply chains brought on by Covid-19, critical supplies of many types were forced into shortages. We all remember the toilet paper shortage, but resources to build new homes and condos were critically disrupted as well. Lumber tripled in price, steel almost doubled, and concrete has doubled in price along with other crucial supplies for building. However, we are seeing a significant dip in several of these key resources.

The lumber price has fallen 44% and steel has dropped 23% as of the publishing of this article. Hoarded supplies from the last year have flooded the market and supply lines are being restored. This factor, at least, is seeing a push to return to a more stable marketplace. This should help ease housing supply in the strongest markets but it will take several years for this to have a significant impact.

Will The Big Squeeze Bubble Pop?

There are a few key factors that would drive a significant drop in home values in this market.

1.    A high number of distressed properties hit the market in a short period of time.

2.    Lending restrictions loosen to an irresponsible level.

3.    Newly built homes flood the market.

4.    Sellers list their homes en masse.

Of these factors the only two that seem even close to likely are distressed properties hitting the market and sellers listing homes all at once. But this would happen only in key markets where you see large numbers of emigration occurring, if they have an effect at all. So no, this bubble is more than likely not going to pop.

The Current State of The Big Squeeze

As of June 2021, the United States is in a much different position compared to one year before. Many states are beginning to open up, which can have differing effects on housing markets throughout the 50 states. Overall the grip of The Big Squeeze seems to be loosening. 

In the Phoenix area we see the average number of available homes have crept up. In March 2021 there was only an average of 3,500 homes available on any given day. Now that average is around 5,500 per day and is slowly trending up. This seems to be a national trend as well.

Overall what we expect to see is a leveling off of home prices as the markets stabilize over the next few years. Let's just hope we don’t see another one of these for the next 100 years.

If you happen to be in the market to buy or sell a home in Arizona don't hesitate to contact us here at The Kay-Grant Group.