Will There Be a Housing Bubble?

I've been getting one question a lot lately, "Will there be a housing bubble?" 

With housing prices appreciating rapidly, it's a valid concern, but the short answer is NO, we are not headed into a bubble. Today's market conditions are vastly different from those more than a decade ago. 

Here's what Scott Bradley, President of Berkshire Hathaway HomeServices Hawaii Properties had to say:

“A real estate ‘bubble’ is characterized and fueled by speculation, and that is not what we are experiencing now. The unprecedented market strength we are seeing today is driven by simple economic fundamentals: supply, demand, and the cost and availability of money. Current historically low interest rates are a prime catalyst driving sales. An imbalance of supply and demand is further fueling a hot market."

However, with more sellers anticipated to list their homes in Spring of 2022, we are likely to see a slight market correction. The key word here is slight, because this does not mean homes values will stop appreciating, or that homes will lose value. 

Instead, we're more likely to see appreciation return to more "normal" levels. For reference, normal appreciation is considered around 5% per year. In the past two years, we've seen home values rise by as much as 18% in some parts of Los Angeles. 

So, for anyone waiting to buy property when the "bubble bursts," the important thing to note is even when appreciation slows down, the cheapest home you're going to buy is the one you buy today. 

Not only in terms of the home's value, but also in terms of opportunity cost. With interest rates still at historic lows, you can afford a more expensive home today and keep your monthly payment lower than when rates rise. 
 
The main takeaway is this — until we have more inventory, housing prices will continue trending upward.

And the reason why we have a lack of inventory goes beyond pandemic-fueled demand... 

The first reason is we simply don't have enough new construction. A lot of builders got out of the industry after the last market crash, and the industry as a whole is lacking skilled labor. 

The second, is that more and more Baby Boomers are aging in place, so their homes aren't hitting the market. When these homes do get listed, more often than not, they require updating to current market standards.

And as we know, the biggest segment of homebuyers right now are Millennials, 75% of whom are looking for move-in ready properties — and are either not wanting to take on a project, or can't afford the additional renovation costs.

So, the responsibility of bringing move-in ready homes to market falls on investors. However, with home prices being so high, it becomes more difficult for investors to make profitable margins on the resale, which keeps the investment pool narrow. You can see how these conditions are vastly different from the last housing bubble.

If you have more questions about today's market and you'd like to talk one-on-one, please reach out any time, it'd be my pleasure to help.