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Is the Housing Market in a Bubble? Don't think so...

Updated: Apr 6, 2023

Everyone knows property values have been skyrocketing over the last year. According to the FHFA (Federal Housing Finance Agency), the average price of an existing home grew by 20% between August 2020 and August 2021, increasing, on average, by a record $348,000. This price appreciation is almost double that seen in the year-over-year gains during the housing bubble of 2005 through 2008.

Yes, the current housing market is quite different from that period. Note: the speculation and bad loans that pushed home sales and prices into an overinflated bubble from ‘05 through ‘08 are not factors today. Currently, market prices are being driven by limited availability.

Is it a real Seller’s Market?

According to the NAR (National Association of Realtors), there were 1.1 million existing homes for sale across the U.S. this past September (2021), which was fewer than any other September during the last 39 years (since 1982).

Notably, the NAR said there were 1.6 million existing homes for sale in September of 2019 while there were 3.3 million for sale in September 2007, which was the peak of the last (2005 through 2008) housing bubble.

Should we expect home prices to crash?

As it will take quite a while for the availability of housing to improve, this limited supply undoubtedly supports strong housing prices continuing. Unfortunately, availability is especially limited in the more affordable price segments for potential new buyers, especially first-time buyers.

For example, in September, sales of homes priced at $250,000 and below were down 22% year-over-year and accounted for about 29% of all sales, according to the NAR. The decline in transactions is not due to a lack of demand; it is due to the lack of availability and appreciating property values.

On the other hand, sales of properties priced from $750,000 to over $1 million were 40% higher and accounted for about 12% of all transactions. As a point of reference, the NAR confirmed that in August of 2017, homes in that range ($750k to $1ml) accounted for just 5.4% of sales.

Should prospective buyers stay hopeful?

Yes, they should because overall market conditions combined with falling COVID-19 risks are recently enticing more homes to the market. And, builders have also been speeding up the pace of new construction. But, after more than ten years of under-construction relative to population growth, it may take years for the new home market to be balanced.

Is Housing key to building personal wealth?

For most American households, a home is their most significant source of wealth. The Federal Reserve’s Survey of Consumer Finances says that in 2019, 64.9% of U.S. households lived in a property they owned outright or for which they paid a mortgage

And, we should note that people in the U.S. owned 67.7% of household equity at the end of this year’s second quarter, which is up 15 percentage points from their 52.7% ownership stake at the onset of the Great Recession in the first quarter of 2008. At the end of the second quarter of 2021, the Fed estimated U.S. residential property worth approximately $26.3 trillion.

What does this mean?

All indicators point to a seller’s market remaining over the next few years. And, yet, the market is functioning as it should; let’s note that during this housing bubble, rising prices have led to more robust demand as investors/speculators flip homes for a fast profit. When new home prices jumped late this Spring (2021) due to a spike in lumber prices, demand cooled off until lumber prices came down; thus, the market, again, reacted as it should.

Overall, the housing market appears to be well supported by sound financing and the fact that demand still exceeds supply.

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