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More than 18 months into the COVID-19 pandemic, much about the pandemic-era economy remains unusual and difficult to analyze. From a labor market that has both worker shortages and high unemployment to supply chain breakdowns and inflation fears, it has been a challenge to assess the true state of the economy and what it might mean for the next few years.
This confusion has extended to the real estate market, one of the most noteworthy economic stories of the pandemic. Demand reached new peaks with more millennials reaching home buying age, generous government stimulus, strong savings rates and market returns, and a premium on living space with more people socially distancing and working from home. But this demand has not been met with a commensurate increase in supply, which has sent housing prices to record heights.
What remains to be seen is whether these increases represent a new normal or a real estate bubble. With prices rising so rapidly, some observers fear that houses are overvalued and that if the bubble bursts, the economy could see a prolonged recession as happened in the mid- to late 2000s.
Two decades ago, the housing market was experiencing a similarly dramatic surge in prices. However, many homeowners were being approved for mortgages that were beyond their actual means. When prices began to fall, these homeowners found themselves financially underwater, leading to increased mortgage delinquency rates and foreclosures. This in turn set off the financial crisis and the Great Recession. During the worst of the recession in 2010, the rate of residential mortgages that were delinquent by more than 90 days reached 4.9%, and it took more than five years for that rate to return to pre-recession levels.