Housing Bubble… Yes or No?

There’s a lot of interest in the 2022 real estate market. Will inventory increase or remain low? Will prices continue to rise, and if so, by how much? How high might mortgage rates go and will that impact demand?

Perhaps the biggest question of all is this: Are we experiencing a housing bubble and if so, will it burst this year? 

Rocket Mortgage defines a housing bubble like this:

“A housing bubble (aka a real estate bubble) is generally defined as a period of unexpected or unusual growth in demand for real estate and housing, paired alongside a sudden or uncommon spike in home pricing…[t]hese circumstances occur when demand greatly outpaces supply and homebuyers are faced with a limited choice of options, causing prices on available houses to go up as a result … In other words, housing bubbles occur when buyers are keen to get their hands on homes, but can’t find enough viable properties on the market, because they’re willing to pay top dollar to secure these real estate holdings.”  

Some experts say there is a bubble, while some believe there is not. Bubble or not, it’s a fact that supply is low, demand is high, prices are still rising, and something is probably going to happen.

On March 29, the Federal Reserve Bank of Dallas made a blog post in which they said a bubble is indeed brewing and provided some possibilities for it to reach a “tipping point.” 

“Our evidence points to abnormal US housing market behavior for the first time since the boom of the early 2000s,” wrote the authors of the blog post. “Reasons for concern are clear in certain economic indicators … which show signs that 2021 house prices appear increasingly out of step with fundamentals.”

A few other related points the authors made:

  • Looking at the data sets they reviewed, prices are growing at an “exponential” rate and “exceeding what economic fundamentals would justify.”
  • The authors said prices may be rising to a point they call “exuberance” in which they become “increasingly out of sync with the economic fundamentals underpinning the market.”
  • Real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. If many buyers share this belief, purchases arising from a “fear of missing out” can drive up prices and heighten expectations of strong house-price gains.

The authors said that it is imperative for prospective buyers and sellers to know the state of the housing market. Policymakers should also pay close attention to the market so they can respond appropriately “before misalignments become so severe that subsequent corrections produce economic upheaval.”

According to a CNN Business story using data from John Burns Real Estate Consulting, investors now buy 33% of the homes in the US – a share that is 5% larger than the average over the past 10 years.  

While some may look back to the crisis of 2007-2009, the blog authors said the situations then vary significantly from 2022: “Using a novel statistical toolkit for assessing the health of the U.S. housing market in real-time, we argue that the underlying causes of the run-up differ from those during the last housing boom, which preceded the 2007–09 Global Financial Crisis,” they wrote. 

The 2007 crash, CNN wrote, “was fueled by cheap credit and lax lending standards that resulted in millions of homeowners owing more on their homes than they were worth.” 

That’s not the case now. According to CoreLogic’s most recent Homeowner Equity Report, homeowners in the US gained $3.2 trillion in equity last year, an increase of just over 29% from the year prior. That represents an average gain nationally of $55,300 per borrower, with $40,000 being the average for homeowners here in Virginia.

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