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No, We’re Not in a Bubble
Making sense of what’s going on in the red-hot housing market
Real estate. It’s on everyone’s minds. At least it certainly feels that way. Everywhere you turn, there’s an article about home prices soaring to record highs, a tweet about someone getting outbid on a home they offered 10% above ask, or a video trying to make sense of the market right now and if one should get involved. Anecdotes have prevailed in these uncertain times. It’s a bubble! Home prices have increased 25% in our market, and it’s going to pop like 2008. We’ve all heard or uttered these words in the past several months.
There’s talk of bubbles and crashes. There’s confusion. Dismay about whether younger folks will ever be able to afford a home. What’s going on?!
First, the housing market isn’t broken. It’s operating exactly in the way one would expect based on how it’s been structured. The system may be fundamentally broken, but the market is not. This gives me some level of confidence in saying that I don’t believe we’re in a housing bubble. Technical indicators don’t point to one, either. (Here’s to this paragraph aging like sour milk if we are in a bubble or going unnoticed if we’re not.)
So, if we’re not in a housing bubble, what exactly is happening? There are three prevailing themes, as I see them, that explain the state of the market.
Let’s break them down.
The macroeconomic view
Two factors are driving the housing market right now from a macroeconomic perspective: low interest rates and higher net worths (via savings and equities). Unprecedented liquidity from the federal government is also helping, but not to the extent that it can be pointed to as a key driver for prospective homebuyers, as the stimulus packages have been targeted toward basic infrastructure and assistance programs for lower-income groups.
At the beginning of the pandemic, the fed cut interest rates to help stimulate the economy and stabilize it from the systems shock of the coronavirus. It has maintained this stance in the year since and anticipates keeping rates low until 2023. With the fed introducing and standing by this aggressive policy, mortgage rates…
