Low inventory and high demand have been driving home prices at a record pace and to record heights now for months.
Most recently, the National Association of Realtors (NAR) reported in April that the median single-family home price nationwide rose 18.4% year over year in March to $334,500, both record highs.
With prices so high and still rising, it’s natural to be concerned about the possibility of a housing bubble and subsequent burst.
Market ups and downs are nothing new, and it doesn’t take that long a memory to recall what happened to the housing market in the Great Recession, a grinding national affair that included Wall Street failures, massive foreclosures, and housing prices falling an average 33% from a peak in 2006 to a trough in 2011.
That figure is from a CoreLogic report issued in March 2018 that examined the housing market’s recovery to that point. Since then, of course, a pandemic struck, interest rates have dropped to record levels, and bidding wars have emerged once more in many markets.
So, while real estate investors ponder if that sticker price for their next flip or rental is too low, too high, or just right, now seems like a good time to seek some expert input.
We asked four industry experts — three economists and a veteran lender — a few questions about all this, beginning with just what a bubble is and ending with their advice about what real estate investors should do next.
Here’s what they had to say.
Daryl Fairweather
Chief economist at Redfin since September 2018. A former behavioral economist at Amazon, she holds a Ph.D. in economics from the University of Chicago.
How do you define a “housing bubble”?
A real estate bubble happens when home prices rise at a rapid rate to a level of instability. They typically begin when there’s a shortage of inventory and an increase in demand in a market, which pushes prices higher and causes more buyers to jump into the market on speculation that prices will continue to soar. Eventually, prices get to an unsustainable level — that’s when demand plummets, supply increases, and prices can fall drastically, effectively bursting the bubble.
Do you think we’re in one? Why or why not?
No, I wouldn’t call this a housing bubble. The demand for homes right now is logical, not based on speculation. The way Americans use their homes has changed dramatically during the pandemic, so it makes sense that many people would want to purchase a new home to fit their lifestyle.
Today’s buyers can also afford the high prices they’ve been paying. While demand and prices may start to come down from this peak, it won’t be a crash. Rather, it will be a slow decline as the economy opens and Americans find new ways to spend their money.
How does the current housing market compare to the one immediately prior to the Great Recession? What’s the same? What’s different?
This low inventory and high demand environment might feel similar to those who experienced the last crash, but the similarities between both markets really end there. The last bubble was primarily the result of irresponsible lending practices, where pretty much anyone who wanted a mortgage could get one, regardless of their ability to pay it back.
This time, lenders are limiting mortgages to only the most qualified borrowers. And given the amount of cash it’s taking for buyers to win bidding wars these days, buyers who successfully buy a home are often coming in with a good amount of equity.
What would be your best advice to investors in residential real estate for now?
For small/individual investors specifically I would say this: Be aware of what you can truly afford, how much risk you’re willing to take on, and know when to walk away. It’s easy to get swept up in the pace of this market and give everything you have and more in order to win, but there will always be another home and another opportunity down the road.
Glenn Brunker
President of mortgage lender Ally Homes for three years. He has more than 35 years of experience in the consumer and mortgage lending industries.
How do you define a “housing bubble”?A housing bubble is an increase in home prices, driven by increased demand and limited supply of homes on the market. The bubble then “bursts” when supply increases and at the same time demand decreases or flattens, resulting in a sharp drop in prices.
Do you think we’re in one? Why or why not?
While we are in a volatile housing market, the underlying 2008 contributors are just not there to call our current housing market a bubble. There are a few key differences between the current environment and that of more than a decade ago.
First, subprime mortgages are not happening due to more stringent lending practices. Second, even though lack of inventory, increased building costs, and low rates have combined to create a perfect storm to drive home prices higher, prices overall have been on the rise for several years.
This has given many homeowners a lot of equity in their homes, protecting them from potential price drops in the future. Mortgage forbearance programs have also helped consumers keep their homes and avoid negative impacts to banking institutions, so banks are in a far more stable position than they were in 2008.
Lastly, the definition of a housing bubble requires a sharp drop in home prices post reaching a supply surplus. This would only occur if existing homes were put on the market at vast scale and new home builds outpaced demand. Right now, many consumers are opting against putting their homes on the market due to the lack of inventory as well as the high cost to purchase new, and costs for land, lumber, and labor make new home building very challenging.
How does the current housing market compare to the one immediately prior to the Great Recession? What’s the same? What’s different?
Looking through a rearview mirror, it’s safe to say some of the hallmark indicators of the 2008 housing bubble, including incredible lending volume and questionable lending practices, do not appear to be factors now.
The factors we are facing today include high demand, low supply, and low rates driven by COVID-19, which are driving home prices up. We are in a seller’s market, where homes are appreciating at levels that cannot be maintained long term. In the coming year(s), we expect to see rates slowly rebound and home prices stabilize as things return to normal and we move past the pandemic.
Lastly, banks are not in the same position as they were in 2008. This is due to many factors, but one significant difference is mortgages are not entering into foreclosure at the rate in which they were during the great recession. This is due to the regulatory scrutiny that has been put in place.
Lastly, mortgage forbearance programs during the COVID-19 pandemic proactively helped with this problem as well. Thus, large banks will not have to be bailed out because of this pandemic. In fact, many would argue that their balance sheets look a lot more attractive than even before the pandemic hit.
What would be your best advice to investors in residential real estate for now?
A combination of increasing rates and record-high home prices could be the perfect storm for many prospecting investors this season, adding an extra hurdle to finding homes they can comfortably afford. This is especially challenging for first-time investors, as they do not have growing equity from previous investments to apply toward down payments.
It’s important to note, even with rising rates and increased prices, homes are still flying off the market at record speeds. However, if prices become too inflated, there is a high chance that home sales will slow and prices could be driven down, creating a huge benefit to buyers and investors.
Lawrence Yun
Nearly 21 years with the NAR, and chief economist since 2008. He holds a Ph.D. in economics from the University of Maryland.
How do you define a “housing bubble”?
As an unsustainable increase, hence a decline afterwards.
Do you think we’re in one? Why or why not?
Sound underwriting on mortgages assures there will be fewer risky buyers, and there’s a massive housing shortage that will take several years to relieve. Therefore, the prospect of a price decline is minimal.
How does the current housing market compare to the one immediately prior to the Great Recession? What’s the same? What’s different?
Bad risky subprime mortgages combined with overproduction by the builders caused the foreclosure crisis. Today, the situation is the exact opposite. I wish homebuilders would ramp up production to temper the price appreciation.
What would be your best advice to investors in residential real estate for now?
Price growth will slow from 2022. I think you can feel assured rental income will be steady.
Robert Dietz
Has been with the National Association of Home Builders (NAHB) for 15 years, the past five as chief economist. He holds a Ph.D. in economics from The Ohio State University.
How do you define a “housing bubble”?
A housing bubble is an unsustainable period of home price growth and construction generated by artificial demand, such as speculative behavior or loose underwriting.
Do you think we’re in one? Why or why not?
We are not in a housing bubble. Home prices are rapidly rising because construction is not keeping pace with real, underlying, demographically led demand. However, the current pace of pricing is frothy or unsustainable because it is outpacing income growth. Additional housing supply is needed to provide stability to the market.
How does the current housing market compare to the one immediately prior to the Great Recession? What’s the same? What’s different?
The markets are different. Today, there is a significant deficit of housing, perhaps 3 million homes, due to multiple years of underbuilding. Prior to the Great Recession, there was a growing surplus of homes, led by investor purchasing and home-price chasing.
What would be your best advice to investors in residential real estate for now?
Single-family rentals offer a window of opportunity due to the inability of some households to afford a down payment but nevertheless want a single-family home. All participants in the housing market should watch building material costs and interest rates as factors that could price out households in the market going forward.
The Millionacres bottom line
No two economic cycles are the same, and the difference between the Great Recession and the pandemic recession is starkly apparent in the housing market. While all market decisions on the individual level are ultimately hyper-local, these industry experts agree that the underlying factors that drove the housing collapse that bottomed out a decade ago no longer exist. Proceed, but with caution.