A housing bubble is generally determined if there is a rapid price appreciation that is detached from the normal reasons in price increases or decreases.
Why are home prices increasing?
Long-term trends (housing supply) and immediate factors (COVID) are the primary factors in home prices today.
A Freddie Mac report found in 2018 that the housing shortage was at 2.5 million homes; in 2020, that number skyrocketed even further to 3.8 million. This is an especially difficult problem for first-time homebuyers since entry-level homes are a small share of new construction. Starter homes dropped from 40 percent of newly built houses in the early 1980s to just 7 percent in 2019, according to the same report.
The emphasis on work-from-home models due to COVID are also driving home values. Buyers from big cities moving to more affordable markets, like Richmond, drive up prices in these less expensive cities. Additionally, homeowners or renters in the same market are deciding to “trade up” to a home with more office space, a larger yard, etc. (See our blog discussing the impact of remote work on home ownership.)
So are we in a bubble or not?
Prices rise and fall for assets all the time for a variety of reasons, so what defines a bubble?
A housing bubble is determined by rapid price appreciation that is detached from normal fundamental reasons why prices increase or decrease. A house’s fundamental value includes things such as its proximity to good jobs, whether the school district is good, its desirable characteristics, etc. For example, if a home is in a desirable area, but there aren’t enough homes for incoming residents, the fundamental value of each house will rise.
So are we in the midst of a housing bubble today? We are not. The case against calling this a housing bubble is pretty straightforward. Prices are rising primarily due to low supply and a surge in demand as millennials age into the prime home-buying years.
As the National Association of Realtors reports, millennial buyers make up the largest share of homebuyers at 37 percent. Having overtaken baby boomers as America’s largest generation in 2020, it’s no surprise that, as they reached the age when people generally begin buying homes, there would be a sharp increase in demand.
And while house prices could flatten in the next few years, the conditions for another crash are absent. Tight supply and strong demand will keep prices elevated for some time.
What does this mean for you?
As always, the longer you stay in a home, the better your chances of turning a profit when it’s time to sell. The thing we’ve learned about real estate from father time is that it’s not timing the market, it’s time in the market that matters over the long term. So for today’s buyers, the question might not be “will home prices go down?” but “will I stay in my home long enough for some equity to go up?”
Typically, experts recommend homebuyers stay in their homes for at least five years to recoup the downpayment and closing costs, which can eat up 10% to 15% of the purchase price.
Instead of trying to time the market or wait on the sidelines, we recommend making a budget and figuring out what you’re comfortable spending.
That’s where a trusted advisor like Ruckart Real Estate comes in. We’re here to be an ally in your home buying or selling process. We will work with you to set your goals and focus on the best outcome, without being distracted by all the “noise” and activity in today’s market. Let’s start the conversation today!