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3 Reasons We Might Be in a Housing Bubble and 3 Reasons We Aren't


Oct 01, 2020 by Liz Brumer

2020 has without a doubt been a year of confusion, doubt, and general hesitation, leaving many at a loss about what to do or what's to come. And real estate is no exception. During a time of high unemployment and economic uncertainty, we are seeing record home prices across the country. Some experts are warning that we are in another housing bubble while others are confident we're not. Let's dive into some of the details to see how each side has plenty of data to support their claims.

3 reasons we are in a housing bubble

Home prices have rebounded 59% since the low in 2012, according to the Case-Shiller U.S. National Home Price Index. When you compare this rapid increase in sale price to other metrics like unemployment, wages, and inflation, it's clearly outpacing interrelated factors when it comes to purchasing a home.

Case 1: Unemployment initially went through the roof during the onset of the pandemic. Even though it has recovered a bit, unemployment rates compared to the previous two recessions as determined by the Bureau of Labor Statistics are almost double. Current unemployment this year has gone from a high of 14.7% to 8.4%. In previous recessions, unemployment was hovering closer to the 5% mark. High unemployment means lack of income and the potential inability to pay a mortgage or rent or keep the economic wheels turning, all of which puts downward pressure on lending and spending.

Case 2: Wages have had trouble keeping pace with appreciation, rising rental rates, and general cost of living in many areas. The real average hourly wage calculated by the Bureau of Labor Statistics from 2018 to 2019 rose just 0.6%. This isn't a recent issue; there have only been 10 years of consistent positive wage growth out of the past 40 years. If housing prices are rising and wages aren't, people will have difficulty finding affordable housing, a problem that has been receiving more and more attention over the past few years.

Case 3: While inflation has been increasing, it is nowhere near the exponential growth in sale prices of homes. Inflation has ranged between 0.7 and 3% in the past decade. Home values have risen 44% annually in some markets. If the market was simply adjusting with inflation, you would see home values increase in step with or close to that of inflation.

3 reasons we are not in a housing bubble

Increased prices in home sales over the past year are driven by supply and demand. Currently there are more buyers than there are sellers, which pushes the price for homes up because of increased demand and causes things like bidding wars. There was already a low inventory supply pre-pandemic, but many who were preparing to sell are waiting until after the virus settles, pushing already low inventory even lower. Now that construction and renovations have rallied above pre-recession levels, construction costs have skyrocketed, causing a lumber shortage.

Case 1: In the 2008 crisis, there was a surplus of homes and purchasing was being driven by poor lending practices incentivizing people to borrow and buy. When the economy started to crumble, there was a surplus of homes with not enough qualified buyers. Prices today aren't being driven by the same factors. As more supply comes online, prices will naturally regulate themselves. Instead of an extreme drop, it's normal and expected to have a gentle correction in accordance with demand.

Case 2: The average cost to rent a large three-bedroom two-bath home was around $2,000 this past year. The average monthly mortgage payment for a similar residence is around $1,100. As long as down payment funds are available or assistance with them is accessible, it would make more sense to buy than rent. This would only further support the rising home prices.

Case 3: Mortgage rates are at an all-time low. Currently they are under 3%, which is in line with or even below inflation levels. This means that over time, your mortgage rate is essentially washed out. It also allows buyers to afford slightly more expensive houses because the monthly payments will be lower. Lower costs to borrow incentivise people to spend.

Bubble or no bubble? No one truly knows

Predictions are funny things. Those on both sides of the table will make their statements and support them with evidence that suits their argument. But in the end it seems only time, not people, will tell. Taking the middle road and making an informed decision based on need, not speculation, will likely be the safest approach.

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