Are We In A Housing Bubble
We asked 32 experts, and most said no. They explain their answers and offer insight about what we could see with housing prices in the coming months.
While the real-estate market has historically followed a cycle that aligns with the season changes, nothing has been typical, predictable, or even rational about the United States' housing market in the past two years.
It was anyone's guess what would happen to global financial markets during the spring of 2020 as the coronavirus made its way around the world and turned life upside-down for millions of people. But thanks to a $2 trillion stimulus package, the US entered into one of the most dramatic bull runs in recent history. All-time highs became common on Wall Street and Main Street as money poured into investments.
But a combination of low interest rates and high demand has led the US real-estate market into territory not seen since the boom in the early to mid-2000s.
So what happens next? Will a growing real-estate bubble burst in a spectacular fashion, bringing down the rest of the economy with it? Or is demand for housing simply so high — and inflation so pervasive — that the extreme price growth over the past two years is here to stay? Will the real-estate market encounter a slowdown and a similar price correction that Wall Street has experienced this year?
To help make sense of the market, we asked 32 experts the same question: Are we in a real-estate bubble?
We, like so many others, are wondering: Are homes becoming so expensive that sale prices appear to be artificially inflated, dangerously unbalanced, unjustifiable, or some combination of these? If so, who stands to benefit or lose the most?
The group of experts — which includes esteemed economists, lenders, and investors — shared their insights about the market and offered analyses of how it compares with previous booms and busts, as well as some predictions for what could come next.
Most respondents said they do not believe the current market conditions signal that the country is witnessing a true real-estate bubble, while a handful said they do believe that we could see a dramatic enough decline in demand and home prices to signal a proper market correction — or worse. A few felt that it may still be too early, or too difficult, to really say. However, they overwhelmingly said they believe that the market will cool off as interest rates climb and inflation drives down the value of buyers' cash savings.
The experts identified several themes as having a major influence on buyer behavior and market prices, including supply-chain disruptions, cheap credit and a swath of qualified buyers, a generational demographic change as millennials approach their 40s, the pandemic's disruption of office culture and remote work, and a good old-fashioned fear of missing out.
The issue of housing affordability predates the pandemic, as many cities — particularly coastal cities — had high rents and housing costs in the years leading up to 2020. But the past two years have intensified it to a degree that many prospective millennial and Gen Z homebuyers are not only sitting out this market but starting to lose hope of ever owning a house.
Here's what each expert thinks of the US real-estate boom — and whether the market is indicative of a bubble.
Tendayi Kapfidze, chief economist at US Bank
For me, a bubble means that you get a significant price correction.
I just don't expect that, because there was a financial element to the appreciation we saw over the past few years, but there were also fundamentals at play. And a lot of those fundamentals are still in place to continue supporting the housing market.
One of the bigger things supporting the housing market is demographics. Demographics are a big driver of demand in the housing market. If you look at age cohorts in the United States, the 30- to 35-year-old age cohort is actually the largest age group in the US. And a lot of those people are getting into their peak homebuying years. They're a little bit more established in their careers, some are starting families, et cetera. And so that's a kind of fundamental source of demand for the housing market that I think is going to last for a number of years.
The most different thing is really just the underwriting standards around mortgages and housing. You've known the types of products that got people into trouble in the housing bubble — things like negative-amortization adjustable-rate mortgages, short-term ARMs. ARMs products as a whole are a very small part of the mortgage market. Most mortgages are now fixed-rate.
Daan Struyven, senior global economist at Goldman Sachs
The main reason we think there is no US residential housing bubble is that housing supply is very tight. In fact, the Q1 homeowner vacancy rate fell to an all-time low of 0.8%. Similarly, the month's supply of existing homes available for sale remained near the lowest level on record in March.
That being said, I want to make three important caveats. One is identifying fair prices in real time is inherently challenging. Two, the surge in home prices and jump in mortgage rates have led to sharp declines in our Goldman Sachs housing-affordability index. Three, given the deterioration in affordability, we expect home-price growth to slow from just over 10% this year to home-price growth in the low single digits by mid-2023.
Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate Mortgage
I think we're at an interesting time right now, because for the last two years prices have just been going up like crazy. And it's been because of the lack of supply, it's been because money was incredibly cheap, and it was because people were bored of being trapped inside and looking for some level of hope.
Now, if all of a sudden we had a great amount of supply and people were no longer interested, then we could argue it was a bubble. But we still have a very low supply, and we still have quite a demand.
2008 weighs heavily on liar loans, as they're called in the industry. Those ARMs, like the adjustable-rate mortgages they had at that time, prior to 2008, they trapped people. It would be these huge repayments if you tried to get out too soon. All of the rules have changed on that. So lending in the last few years — especially during COVID — we had our microscopes out. We were looking at every borrower as closely as possible.
As rates are going up, we are starting to see less investors — not corporate investors. The corporate investors are still there; they're not borrowing money at the rate that the average American is. And that's very important to note, because that's a driving motivating factor that we're not seeing ease off. That has made certain parts of the country incredibly unaffordable, because they're competing with cash offers.
Danielle Hale, chief economist at Realtor.com
I think at a basic level it's prices that are going up at a pace that doesn't seem sustainable. So I think by that definition, yes, I do think that home-price growth will slow. But I think the other piece of it is how it ends, and for a lot of people a bubble ends by popping, and by popping there is a big decline in prices.
So by that definition, I don't think the housing market is in a bubble, because with the limited number of homes for sale that we have due to a decade, essentially, of underbuilding, I think it's going to be hard to see home prices decline in a big way. So I do think the run-up is slow. I don't think we're going to see the pop that would define a classic bubble.
If you look at the last decade and compare household formation to construction, we have seen 5.8 million more households formed than single-family homes built. That's a pretty big gap, especially when you consider we build 1.2 million single-family homes per year.
So, put another way: If we only built to fill that gap, it would take us four to five years to completely fill in that gap and really catch up to where we were about a decade ago.
Molly Boesel, deputy chief economist at CoreLogic
No, I'd say there is not a housing bubble. I think we get this question a lot because there was a housing bubble back before the Great Recession, in that 2007, 2008, 2009 period.
And I can see why people ask the question now too, because you look at prices: We've been seeing record levels, year-over-year increases just month after month after month.
But the implication with a bubble is that it's going to burst, and I don't see that happening. If prices are going up and then they slowly moderate over time, that's not really what we're worried about with a bubble.
I think the main reason why we wouldn't see a bubble popping or prices really go down is that there is just a shortage of houses for sale, and so for home prices to decline rapidly, you'd really need to see a big supply on the market — that would take the air out of the market. But we're just not seeing that.
Jeff Greene, billionaire real-estate investor
The Fed was keeping interest rates at levels below the rate of inflation for an extended period of time. I mean, of course, who's not going to borrow money if you can? If you can borrow it at a quarter of the rate of inflation.
We're already seeing rents can drop a little bit in West Palm Beach. We started a 200-unit building here in West Palm Beach. The only reason we started this was because I locked in a 10-year loan at 2.6% fixed. Now that loan would be in the fours. It may not make as much sense.
In every cycle, some people take on a lot of debt. And they don't have a lot of margin of error. So I see people who have leveraged will be in trouble.
I don't think we're going to have that big crash where you start to see things dropping like some of these stocks like that have dropped. But I think you'll have a correction.
Mark Stapp, professor of real estate at Arizona State University
In the Great Recession, we had lots of people buying houses for purely investment purposes, because they could get money. And they shouldn't have been able to borrow, but they were. Therefore, it fueled a substantial amount of homebuying that had no real underlying economic demand associated with it. And so you had an oversupply of homes. When the mortgage crisis hit, the market realized that a lot of those houses had no real occupancy or demand for them. We don't have that today — we have the opposite of that.
Remember after the Great Recession a lot of people were damaged, and so you had a lot of people for six, seven, 10 years that couldn't buy a house. It really drove the rental market. And that is one of the other things, is we had substantially more demand for rental housing, and it, too, was being underbuilt.
The rise in interest rates that has occurred so quickly has really pushed people out of the homebuying segment of the market. And it's happened to people in the middle of their purchase.
I think what is definitely going to happen is you're going to see a really significant slowdown in price appreciation. In some places I think we're going to see prices starting to come down. I think the uninformed would look at that and say, "I told you it's a housing bubble." Well, it's not the sign of a bubble simply because house prices stop escalating or even if they start to come down. So it's not bursting, leaving you with nothing.
Kip Sowden, CEO of RREAF Holdings
Anytime you see these sorts of percentage increases in the cost of housing, one has to ask whether we're approaching a bubble. Having been in the commercial-real-estate business for 37 years, I've been through many cycles. This feels quite different.
In the past, institutional investors were only focused on the largest markets, such as New York, LA, San Francisco, Chicago, and Washington, DC. That's changed significantly. We're seeing international capital flowing into secondary and tertiary markets now. Atlanta, Austin, and Dallas are some of the hottest markets for international investment right now.
We're going to continue to experience significant price increases and rent increases across all areas of residential housing. Sellers are benefiting greatly, and buyers are finding it very difficult, with single-family residential properties incredibly difficult to buy.
Today there's more equity than debt coming into the market, and we don't have an oversupply of residential housing like we did in 2008. As long as demand outpaces supply, I don't see the bubble bursting. I think some areas of the country will suffer more and can experience some softening, and those would be the areas with net-negative migration.
Enrique Martínez-García, senior research economist at the Federal Reserve Bank of Dallas
Our base scenario would be that greater awareness of the risk of unsustainable house-price increases can contribute to investors becoming more cautious about the prospects of continued price growth at the current accelerating pace. That coupled with a tightening of monetary policy can cool down the market in 2022 and gradually lower real house-price appreciation back to its historical average of about 2%.
The US housing market is displaying the type of overheating that we last saw in the early stages of the previous housing boom, during the late '90s and early 2000s. Back then, the price run-up continued for five more years, until 2006, and was accompanied by a great deal of financial innovation that prolonged the boom longer and resulted in a larger misalignment of the prices from fundamentals and the subsequent severity of the bust.
At this stage, household balance sheets appear stronger than during the previous boom, and the banking system appears to be in better shape as well. Hence, there appears to be space to withstand a cooling-off period or even an orderly house-price correction. Although a widespread bust in housing does not appear to be the most likely outcome given the evidence we have seen so far, a correction is not out of the realm of possibilities either, particularly in some vulnerable local markets.
Len Kiefer, deputy chief economist at Freddie Mac
I think when most people are talking about a bubble, what they mean is that there's going to be a correction or some adjustment — often very painful.
Certainly the most released home-price data shows prices are all still going up at a very robust rate of growth, although the rate of growth may be moderating. All the indicators that I look at still have prices going up pretty much everywhere in the country; however, the rate of growth is going from 20% to 18%, maybe to 15%.
The longer we maintain these very high rates of house-price growth, it could potentially feed into a bubble because it could create an environment of people starting to think, "Well, prices went up 18% last year, so they will probably go up 18% this year" ... and if that becomes the dominant way of thinking, that's definitely how you would end up in a bubble.
Dean Baker, senior economist at the Center for Economic and Policy Research
Today I'd say it's largely a story of the fundamentals. Vacancy rates are near record lows. Rents are rising rapidly — not as rapidly as sale prices, but they're going in the same direction. It's easy to see, particularly in the last two years, the source of the increased demand. One is obviously low mortgage rates, but the other is increased work from home, which means people could afford to get a bigger place or more expensive place because they're saving on commuting costs, and they need a bigger place for a home office.
I don't expect any sort of plunge or anything, but I think the higher rates will definitely put a very big damper on house prices, and it could lead to some decline. We won't see anything like what we saw in 2007 to 2009. We're not going to see prices fall 30% to 40% nationwide, or 50% to 60% in some places. But it wouldn't surprise me if we do see prices decline nationwide, and in some areas they could well decline 10% to 15%. So I think higher interest rates will be a big factor here.
William Luther, associate professor of economics at Florida Atlantic University
We really have two things going on. First, we have seen house prices rising across the US, and second, we see that in some specific markets, house prices are increasing astronomically.
Over the last year we have been dealing with some high inflation. We've also had a surge in nominal spending, which flows into lots of goods and services and has a tendency to concentrate in long-term consumer durables and residential investments.
It's pretty clear why that's the case: If you're going to have some persistent increase in prices or, correspondingly, persistent reduction in the purchasing power of the dollar, then you want to lock in those prices (for something like an automobile or a house) while those dollars are still more valuable than they will be in the future.
I'm here in South Florida — or sunny South Florida, as we call it — and real-estate prices have just gone through the roof. That has a lot to do with changing preferences and changing constraints as a result of the pandemic.
Bill Adams, chief economist for Comerica
There's no specific market that I'm covering right now where I'm expecting outright price declines. I think we're going to see home-price increases slow, but that would be incremental increases from their now higher level.
There is a substantial backlog of new homes under construction right now, and housing units that have been permitted but not started. Both of those are at the highest since the 1970s. What I'm expecting over the next year or two is we'll start to see catch-up in the big-city, high-density housing markets like Manhattan and downtown Chicago.