Is Vermont In A Housing Bubble?

For our most recent outlook, check out our Vermont Real Estate Outlook for 2022

It’s been a wild year in Vermont real estate. Like much of the country, home prices are soaring at historic rates. Buyers are making full cash offers with no contingencies and the naming rights of their firstborn child. 

We’ve covered the booming housing landscape before, but the market continues to shift, and our clients want to know: are we in a housing bubble and, if so, when is it going to pop?

Is Vermont in a housing bubble?

Whenever someone says housing bubble, most people think back to the 2008 subprime mortgage crisis with a certain level of anxiety. To be clear, 2021 is fundamentally different from what we experienced in the mid-2000s. The 2008 housing bubble and the ensuing stock market crash was a combination of over-confidence in rising home prices and predatory, subprime loan products that collapsed the market when homeowners defaulted. The rest is history.

Early in the pandemic, experts feared COVID-19 would crash the U.S. housing markets by reducing homeowners’ ability to make mortgage payments and lead second-homeowners to sell their investment properties in order to get by with so many unknowns. But these fears subsided pretty quickly with the help of the federal stimulus program, historically low interest rates, and what’s been coined the ‘Great Reshuffling,’ the mass migration of the U.S. population who could now work remotely from anywhere.

Today, the market is not a bubble at risk of collapse but a classic case of historically limited supply and historically high demand. What is driving demand and constricting supply? If the market isn’t going to collapse, what will happen? 

Read on for our thoughts on the matter.

Supply

National Shortage

Before COVID hit U.S. shores, the country and Vermont, in particular, were experiencing a sellers’ market. Multiple studies argued that the U.S. suffered from a severe housing shortage, with an estimated 2.5 million homes needed to make up for the deficit. This set the stage for a strained home market as the pandemic sparked a major reconsideration of what people wanted out of their homes. 

Age in Place

Typically, retirees look to downsize their home over the last few decades, increasing the supply of homes on the market. But over the last few years, we’ve seen older generations decide to ‘age in place,’ keeping their home off the market and restricting the supply of homes from a once-reliable channel. With less supply coming from the used-home side of the market, buyers need to rely on new home construction to help make up for the drop in inventory.

Construction and Lumber Shortage

Unfortunately, builders all over Vermont are booking a year (if not more) out. The delay caused by the pandemic, coupled with rising lumber prices, adds to the housing deficit. Developers and construction companies can’t build homes fast enough to keep up with demand. Building costs are increasing so quickly that many builders elect to hold off before finishing construction to maximize their profits. Coupled with an already limited supply of used homes means we can’t expect relief from new home construction for some time. 

Demand

Millenials - The Biggest Generation

A significant driver of housing demand across the country is the coming-of-first-time-homebuyer-age for the largest generation in history, millennials. Comprising those aged 24-40, many older millennials were strapped for cash coming out of the Great Recession, delaying the purchase of their first home. This created a perfect storm of buyer demand as younger, and older millennials started their home search around the same time. Financial stability and low interest rates led to a massive rush of first-time homebuyers that the market simply wasn’t prepared for. 

COVID Cabin Fever + Great Reshuffling

Read our last article on how COVID sparked a population boom in Vermont. In 2021 Americans continue to flock to the Green Mountain State. The added pressure is helping to drive Vermont home prices ever higher. With increased demand from in-state and out-of-state buyers, we are seeing homes sell considerably higher than their listing price. With more companies adopting permanent remote working policies, the high number of inter-state home buyers could become the norm in Vermont. The ‘Great Reshuffling’ of remote workers only adds to the increased demand from first-time home-buying millennials. 

Historic Interest Rates

Historically low interest rates further drive demand. Buyers have access to cheap capital that allows them to offer more on a home than in previous years. There is much debate over when mortgage rates will begin to rise. According to some reports, the Federal Reserve, which sets the benchmark interest rate, won’t increase rates for another year. But, mortgage rates are more closely tied to the yield of 10-year treasury notes. As the economy recovers post-pandemic, the 10-year yield will begin to increase, driving mortgage rates up from their historic lows. 

So What Can We Expect?

The fundamentals of the current sellers’ market are sound. So, we don’t expect an aggressive crash of the market as prices correct themselves. Instead, we expect the market to plateau, finding an equilibrium that more accurately reflects the supply and demand dynamics we experienced before the pandemic. While prices are still rising, we are seeing inventory start to creep up. Nonetheless, demand will remain high for the foreseeable future. People, especially millennials, are looking to upgrade out of their rental apartment or have outgrown their current home. With consistently strong demand, the market should settle to a more reasonable level as home inventory increases.

Are you interested in learning more about the current state of your market? Vermont Real Estate Company agents serve cities and towns all over Vermont, with key insights for your local market!