Housing boom or bust?
By: J. David Chapman/October 28, 2021
Many in the market to purchase a home are starting to ask if we are entering a real estate bubble, worrying it might end in a bust. Anytime we see a significant increase in housing prices, it is fair to take an in-depth look for the reason prices are increasing. By looking at key indicators and reasons for the increase, we can analyze the chances we could be entering a bubble cycle, which would likely end in a bust.
The housing market has been particularly robust this year, with high demand for homes in almost every area of the nation and every price range. This double-digit price increase reflects the convergence of exceptional demand and chronically low supply. Prices are increasing due to the amount of investment money parked on the sidelines and very low mortgage rates.
The improving economy and the approaching peak home buying years of millennials are driving a residential housing boom. Housing supply is now at its lowest level since the 1970s, due to millennial homeownership and other factors such as rising building prices and real estate investors buying up starter homes. This demand, coupled with low mortgage rates and high housing demand, is causing near-crisis conditions in homeownership, especially in lower-density suburbs.
Price indexes indicate that U.S. home prices increased 11.3% in 2020. We are looking at a lessening in the increase (though still high) to 8.6%. In 2022, predictions are that the increase will again lower to 4.1%, showing that conditions are normalizing and builders and developers are catching up to demand. When we analyze real estate investments to create pro formas, many times we use a 4% appreciation, so this 4.1% number would be welcome from many in the industry and considered a more normal, sustainable increase.
Realtor.com’s data demonstrates that the housing market is continuing to normalize, as newly listed homes are becoming smaller and more affordable, and sellers are becoming more competitive by reducing prices. This is good news considering the continuing gap between wages and prices.
While we still face economic and health challenges ahead, there is no doubt that the nation will continue to recover from this pandemic and an improving economy will continue to prop up the housing market competition. I believe the housing market will remain strong and continue setting records in both 2021 and 2022.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).