Are we in a housing bubble?

While I am not an economist or a crystal ball reader, it is the belief of most that we are not in a bubble. Why? Looking backward to the last housing bubble of 2007 and 2008, the lending practices of the time were vastly different. After the crash, there were various changes to lending practices. 

Furthermore, the current market situation that we are in is vastly different. The inventory is far lower than the current demand for housing. The market should remain stable if the demand for housing outpaces the supply. A balanced market is usually considered to be 6 months of inventory.  In May of 2017 there were 3,203 active residential listings. In May of 2021, there were 1,103 active listings. In May of 2022, there were 1,402 active listings. We currently still have a seller’s market, but it is cooling slightly. Let’s look at why?

It is projected that a recession coming. In real estate, that may not be a bad thing. We have seen inflation rates on the rise, and more importantly mortgage rates are on the rise. Typically, when we enter a recession, the Federal Reserve has to increase interest rates to reverse inflation and mortgage rates as a result begin to drop.

Currently, the mortgage rates are around 5%. Most economist believe we will have a few more increases from the Feds but looking forward into the recession there is projected that mortgage rates will come down. One stat that is also interesting to look at is the appreciation of home values. We have been through a rapid home value increase, historically (except “the bubble”) values have appreciated at a slower pace during a recession. That equates to the home market remaining fairly stable even if inflation increases.

The next response is usually, inflation is too high, I can’t afford to buy a house now. Remember, interest rates are driven by inflation when rates go up, inflation is going up. So the past year has been defined by a hot seller’s market where too many dollars are chasing an extremely low inventory. What happened? Prices of homes have gone up. This helped to cause a loss of buying power. 

However, lets look at the other side. While it maybe tough to purchase now, if you were to purchase a home today, your mortgage payment will remain stable over the next few years. While rental prices will get increased year after year – especially as demand grows for units to rent. One stat I heard recently was that while home prices have gone up around 18% - mortgage rates have only gone up around 2% during the same time. Rental prices for a median 2 bedroom rose 14 percent this past year and is projected to continue to rise.

Final thoughts.

The Fed’s will probably continue to raise interest rates to slow the economy down. Once the economy slows, mortgage rates will drop. As in all things, the economy is a cyclic process always working to balance itself. When supply and demand are balanced, the economy works. When demand exceeds supply, inflation will always work hard to reign in the demand.

The biggest fear for most homebuyer’s right now is if I purchase now, will my house be worth less in 2-3 years? Again, I don’t have a crystal ball. However, most economist say most homes are not likely to lose their value. The demand for housing will continue grow as the population ages. It will grow from the first-time home buyers.

While this market is difficult for buyer’s and seller’s alike (a seller is also a buyer whether downsizing or moving up), a slower appreciation is still appreciation. Most economist agree that the foreseeable future for the real estate market will continue to grow. If inventory doesn’t outpace demand, we should continue to have appreciation.

One real estate forecaster says that even during a recession, purchasing a home is still a sound investment. Property will still appreciate during a recession. Mortgage rates will always go up and down. Renters can always count on rent going up each year.