Are we in a housing bubble?
(NEXSTAR) – At the end of 2021, home prices were 18.5% higher than they had been a year earlier, according to CoreLogic. And just when you thought prices couldn’t go up, they did. In January 2022, home prices rose again as home inventory hit an all-time high, according to the National Association for Realtors. The median price of a home has topped $350,000 nationally.
With astronomical numbers like that, it’s hard to believe it’s not a real estate bubble, but real estate analysts agree it’s not. Here’s what’s really going on.
What is a housing bubble (and how is it different)?
A housing bubble is characterized by a large spike in house prices that is unrelated to other economic fundamentals, such as labor markets, income or wealth, explained Stuart Gabriel, professor and director of the Ziman Center for UCLA Real Estate.
We’ve certainly seen the first part of that definition — a major spike in house prices — but there are clear economic factors driving those increases, Gabriel said, citing a variety of pandemic side effects:
“Very large purchase of second homes by those who could afford it…and in the early stages of the pandemic, city dwellers in high-density units sought refuge in suburban or exurban settings that had greater separation between households, lower densities, more recreational facilities. that were compatible with pandemic safety and things like that.
Basically, the pandemic has fueled a lifestyle demand for home ownership. Combine that with rock-bottom interest rates and prices started going up – and still haven’t stopped.
There have been speculative home purchases, Gabriel acknowledged, like house flips in hot markets. Still, he said that didn’t exactly match the “vast majority” of activity in the housing market, leading him to believe there is no bubble here.
Will house prices go down?
“Just because we don’t think we’re in the middle of a speculative bubble doesn’t mean house prices can’t come down,” Stuart said. “And actually, you know, one of the chances that you’ve had really strong housing demand in recent years has been the record high mortgage interest rates and the availability of cheap credit.”
These rates are expected to change as the Federal Reserve seeks to rein in inflation in 2022. Higher mortgage interest rates will make home ownership more expensive, which should curb the trend of soaring house prices, said Stuart. But he stopped before predicting a big fall.
“There are still very, very high levels of demand for anything affordable,” Stuart said. “We just have such a shortage of housing, especially affordable housing, that units are going to continue to be expensive.”