Mortgage rates are rising fast, the Federal Reserve is hiking interest rates, and people are starting to ask: Are we in a real estate bubble?
You can’t blame buyers, sellers, agents, and everyday consumers for wondering whether the housing market has become overhyped. After all, economists at the Federal Reserve Bank of Dallas published a blog post last week detailing “growing concern that U.S. house prices are again becoming unhinged from fundamentals.”
“Unhinged from fundamentals” sounds scary. Is there a housing bubble that’s about to burst?
For now, real estate experts and economists generally aren’t concerned that the hot housing market is going to implode the way it did when the 2008 subprime mortgage crisis sparked the Great Recession. But they are sharply divided about whether there’s a real estate bubble, what could be fueling it, and the events that might signal a cooling or collapsing housing market.
Yes, There’s a Real Estate Bubble
Even for people who aren’t prone to doom and gloom, recent indications point to the possibility of a real estate bubble.
The most-often cited indication of a housing bubble is mortgage and interest rates. Specifically, mortgage and interest rates plunged to record-lows as the federal government sought to limit the economic fallout of the COVID-19 pandemic. Because of those low rates, people flooded into the housing market, driving up demand and the price of homes.
Now, the federal government is raising interest rates, which has caused the 30-year fixed mortgage to climb above 5% for the first time in a decade. Traditionally, higher mortgage rates result in lower or cooling housing prices. But, as we suggested last month, some consumers may figure if mortgage rates continue to rise, this is the time to lock in a decent rate, which could keep demand for homes strong.
Another factor that could be fueling a frothy housing market is the influence of real estate investors. Investors now buy about one-third of homes in the U.S., and are often able to make cash offers on homes that normal buyers cannot match, which drives up home prices.
Rising inflation may spur even more aggressive buying behavior by real estate investors, as real estate is traditionally a safe harbor against less valuable currency. If investors continue to buy, everyday consumers may find themselves forced to agree to mortgage rates and home prices that are divorced from traditional market fundamentals.
No, We’re Not in a Real Estate Bubble
For all the concern, many experts and agents don’t believe that there’s a real estate bubble.
First and foremost, low housing inventory has resulted in a supply and demand mismatch that many believe is the single biggest source of rising housing prices. In the wake of the late 2000s housing crisis, home building plunged. Over time, there weren’t enough homes available for interested and qualified buyers.
Low inventory isn’t an issue that experts expect to be resolved soon. The cost of housing materials has skyrocketed due to supply-chain issues, inflation, and the war in Ukraine. Plus, millennials, the U.S.’s largest generation, are in or entering prime home buying age, which some experts think will ensure housing demand remains higher than supply.
The other primary reason to be skeptical of a housing bubble is the average personal financial health of home buyers. On average, Americans are in their strongest-ever financial situation, with record-high savings and record-low debt.
In the run-up to the last housing crash, excessive borrowing was rampant and many people were granted mortgages they couldn’t actually pay. Now, economists and real estate agents report that buyers are purchasing homes with significant cash down payments. Coupled with stronger lending guidelines, robust personal financial health means that people who are buying homes today are more likely to make their home payments, reducing the odds there’s a real estate bubble.
As an agent, be prepared to answer client questions about whether there’s a real estate bubble. Keep a finger on the pulse of your local market, encourage buyers to come with strong, cash down offers, and remind sellers that whether there’s a bubble or not, this is a great time to sell a home.