Laurie Johnson

Are We In a Real Estate Bubble?

a bubble in a field

It’s an interesting time in the real estate market. Sellers wonder whether they should sell now, or wait for a higher price. Buyers are flocking to available listings because of rising interest rates. Some people think we are in a real estate bubble. However, there are factors affecting the current market that were not active during the 1989 or 2008 real estate bust.

First of all, the mortgage industry has tightened up and decent interest rates are only available to those with a 760 or higher credit score. The cause of the real estate recession of 2008 was the ease at which borrowers could get mortgage loans. In 1989, there were a lot of investors flipping properties. That is not the case in 2022.

If investors are in the market, they are holding properties as rentals. We’ve seen rental rates rise 30% across the US. The Fed is also working diligently to slow rising home prices. Over both of the last 2 years, we have seen home values rise in double digits. We think it is not sustainable, but the driving factors are very different now.

Builders Challenged by Supply Chain

Everyone knows that supply and demand are always the chief factors in any market activity. After the bust of 2008, many home builders had been somewhat reluctant to build new homes.

In 2020, interest rates were at an all-time low, and many people benefited by refinancing their loans. Of course, builders would have jumped at the opportunity to meet the growing demand in 2020. But it was a time when Covid had begun to affect the supply chain in a way that makes building new housing challenging.

Today, they are still facing supply chain issues and unable to build in a way that meets demand.

A Deficit of New Housing Starts

According to Freddie Mac's Chief Economist, Sam Khater, there has been a growing deficit facing the housing industry, not only during the pandemic, but even before the pandemic hit. In 2018, they estimated the housing shortage to be 2.5 million units, which has only grown since then.

Add the fact that Millennials, who represent our largest population of 72.1 million, are also entering as first-time homebuyers, and we can see how the supply deficit has driven prices upward.

It is estimated that Millennials make up 42% of homebuyers so far in 2022. In any previous market, new construction was geared to meet the trends of this kind of demand. However, developers cite a lack of labor and the cost of lumber rising 150%. They know that the demand is there, but have had difficulty working around zoning restrictions, or the Covid changes to available employment.

Buying a Home is Cheaper than Renting

If you have watched rental prices over the last 5 months, you would see them rising, sometimes $500 each week! Applications for new rentals have gone through the roof and available rentals have dwindled.

What has happened is that each month over the last 2 years, we have witnessed a dwindling supply of inventory. In some cases, it is because people are leaving big cities and are no longer forced to commute. If anyone was on the fence in 2021 about buying, the rising interest rates and expensive rents have quickly roused them to act.

Millennials are a huge demographic and contribute to the way demand outweighs supply. Add in the fact that rents have become more expensive than mortgages and you have a ‘perfect storm’ reducing the amount of inventory.

The National Association of Realtors has said that inventory is lower than it has ever been in the last 20 years since the data has been collected. Anybody that can qualify for a loan or has the cash to purchase is up against Wall Street investors making all cash purchases.

As the Fed works to increase interest rates to slow the market, people think this will bring the market to a halt. Supply vs. demand may undermine any attempts to slow the market through increasing interest rates.

Sellers Finding New Properties

Let’s imagine that a seller has a $450,000 home with a mortgage of 370,000 at a 2.5% interest rate. They are paying about $2000 each month for principle, interest, taxes and insurance. Whether they wanted to downsize or upsize, they would have to accept a new interest rate of 5% and if a higher purchase price, a higher tax rate.  Even if they found a home at that same price, because of the interest rate, they’d now be paying $2200.

And they’d also be entering a competitive seller’s market where a $450,000 house could bid up to $500,000. Now their payment would be $2400 for the same quality house! This is why this market is so different from prior bubbles. We were already challenged by reduced inventory, but if sellers don’t move, even if they want to, the inventory problem only gets worse.

Supply and demand will always determine what happens with home prices.

The thing to keep in mind is that the situation will not improve until we see a normal amount of housing starts or new homes adding inventory to the market. With supply chain challenges and a shortage of workers, this will not be something we will see over the next 2 years.

Is It Time to Buy or Sell?

The market may appear totally crazy right now, but it is the time to buy. There probably won’t be a better time to sell if you want to get a great price and purchase at an acceptable interest rate. The Fed is saying they will roll out many more interest rate hikes.

The key is not to overbid more than you are able to comfortably pay. Get your finances in order and loan approval prior to looking at homes.

It is believed that rising interest rates can slow rising prices, but prices are expected to continue to rise at least 5% each year. That $450,000 home could be $500,000 at a 8% interest rate in 2023. Is it time to buy or sell? The answer is YES.

Contact me today for more advice about buying or selling your home. In this competitive market, you need a strong negotiator, someone who will ensure your offer is the winning offer. If you are thinking of listing your home for sale, I can help you market it in a way that delivers the best price possible.

In my opinion, there has never been a better time to buy or sell.




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