Here’s why we’re not in a housing bubble.
Are we in a housing bubble? Is everything going to burst soon? Are prices going to change or will they keep climbing as they have been?
I’ve always heard that what goes up must come down, and truthfully, over time, we’ve seen rises and falls in the market. Overall, we know that houses are much more expensive than they were 20 years ago (...50 years ago...100 years ago...etc.). Over time, houses will always increase in value. In shorter periods, though, sometimes we see setbacks—whether that means a housing bubble forms and pops or homes lose value due to deterioration or obsolescence.
That said, a few things have changed since our last housing crisis. First off, that housing crisis was motivated by poor debt. Many people couldn’t afford to pay their debts, and it changed the way housing was able to artificially create demand from people who couldn’t actually afford homes. In our current situation, most of the demand is real.
Where is this demand coming from? The first source is population growth. We’ve seen more people forming households over the last five to 10 years, but builders haven’t been building as many houses as they used to. New home construction dropped off a cliff in 2009, and between 2009 and 2019, roughly 5.5 million homes that were expected to be built weren’t built.
Also, access to data and information has changed, meaning institutional investors can now purchase homes. In the last five years, we’ve seen hedge funds and large corporations (even multinational ones) buy up thousands and thousands of homes. Additionally, pension funds, hedge funds, and foreign corporations are buying homes and holding them for rental investment portfolios or to sell them down the line. With so many homes institutionally owned, we have even fewer listings available to the average homebuyer. Since supply is low and demand is high, prices are increasing.
Between those factors—a lack of inventory, increasing household formation, and increasing demand from institutional investors—we’re seeing a different set of circumstances than we’ve seen in the past. This means we’ll probably see another few years of this environment. Even though builders would like to start building more new homes, a lack of land or lack of ability to develop that land may be holding them back. On top of that, it takes time to gather capital, form permits, figure out resources, deploy building plans, etc.
Another short-term problem as far as home building goes is that many builders had to put their plans on hold when COVID first hit. It’s a similar situation to the one we saw the previous decade in that a lot of homes that were supposed to be built in 2020 weren’t built. This will cause a short-term shortage of homes for sale, but our market has a lack of inventory in general compared to the demand. That’s what’s causing what feels like a housing bubble, but it may actually be a housing boom.
As always, if you have questions about our market or there’s anything I can help you with, don’t hesitate to reach out to me. I’d love to hear from you.