Is There Another Real Estate Bubble Coming?

I have had so many discussions with potential buyers about whether the craziness this real estate market has brought means there will be another real estate market bubble. Personally, I think this market is different. The conditions are different, lending is different, and the overall situation causing this craziness is different.

I also came upon an article recently in Bloomberg Businessweek that had some great points. It said:

“The upshot is that while house prices could flatten in the next few years, the conditions for another crash are absent. Rather than over-easy credit, the main factors in the current price runup are tight supply and strong demand, both of which are likely to continue.

Right now, the biggest threat to the housing market is a sharp increase in the current ultralow mortgage rates, which have moderated the impact of rising home prices. It’s not an imminent risk, though. The Federal Reserve has bought almost $1 trillion in mortgage-backed securities to keep mortgage rates down since resuming its purchases in March 2020 and doesn’t plan to stop anytime soon. The Mortgage Bankers Association predicts the rate on the average 30-year fixed-rate mortgage will rise from 3.1% this quarter to 3.5% at the end of 2021 and 4.2% at the end of 2022. (The rate averaged 6.4% in 2006.)

Also on the plus side, only about 0.1% of mortgage loans issued this year carry adjustable rates, compared with about 60% in the bubble years. So homeowners today won’t be shaken out of their homes by rising rates.

Soaring home prices may not be as destabilizing to the financial system as they were in the last bubble, but they do contribute to rising inequality by boosting the wealth of homeowners at the expense of renters. CoreLogic Inc., a data provider, estimates that homeowners’ equity in mortgaged homes increased 16%, or $1.5 trillion, last year alone. It says only 2.8% of people owed more on their mortgages than the homes were worth at yearend, down from 26% who had negative equity in late 2009. That makes the market less fragile. Most people who can’t make payments—say, because of a job loss—can sell at a profit and avoid foreclosure.”

All of these are great points. Are home prices inflated? Maybe a little. But people who are subject to appraisals are finding that their overpriced bids are being reduced to their market rates by their appraisals. Some of those high prices are standing due to cash deals, or buyers writing in clauses offering to pay the cash difference, but I think generally speaking these will even each other out.

I’ve also had some buyers ask if it’s worth waiting. That’s a great question. There are a lot of people that will wait. And rates may rise, but home prices may drop to meet the rise in rates. And rates will not rise substantially in the next year or so. Real estate, like any investing, is a risk. You’ll need to do what’s right for you.