Are We in a Housing Bubble That’s About to Burst?
In this month’s market update, we cover housing bubbles, the return of open houses, and May sales data in your city.
With Bay Area home prices surging month after month and properties selling at record speeds, it’s no wonder why everyone is asking if we’re in a housing bubble.
The real estate market is one of the hottest in recent history – just look at the stunning sales stats for East Bay cities included below. The last time we had a market this frenzied, it ended in a devastating crash.
So, of course, people have worries and questions. The number of U.S. Google searches for “are we in a housing bubble?” increased 800% between March 2020 and March 2021.
Before we try to answer that question, let’s cover the basics.
What is a housing bubble?
According to Investopedia, a housing bubble is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand (yep, we got that✔️) in the face of limited supply (check✔️), which takes a relatively extended period to replenish and increase (check again✔️).
Investopedia goes on to say that during a bubble, speculators pour money into the market, further driving up demand. Then, at some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices and a burst bubble (nope, we’re not there).
We understand why people are nervous. The big bubble of 2005-2007, followed by the mighty pop of 2008 that launched us into the Great Recession, is still fresh in our minds. Nobody wants to experience that again.
Why we’re probably not in a housing bubble
From everything we’re reading and hearing, economic analysts don’t seem worried that today’s supercharged housing market is a bubble about to burst.
The reasons they give:
- 2021 is not 2008: Without going all “The Big Short” on you, we’ll simply say that the real estate landscape is different now. Supply-and-demand is fueling the current market, not predatory lending practices and risky Wall Street behaviors of the past.
- Higher bar to qualify for loans: It’s harder for lower-income people and folks with substandard credit to buy a home; the median required FICO score is 45 points higher than it was before the last crisis, according to the Urban Institute. That means there’s a smaller chance that masses of homeowners could find themselves underwater on mortgages like they did during the previous crisis.
- More personal savings: Many higher-income individuals actually saved money during the pandemic, according to the U.S. Bureau of Economic Analysis. These buyers are in a position to buy property now, put more money down, and secure a better mortgage deal.
- Supply and demand: There’s no end in sight for the high housing demand or the meager housing inventory in the Bay Area and California as a whole. As our friend Jay Vorhees of JVM Lending recently wrote in his blog: “Homebuying demographics are peaking, as a surge of millennials is just now hitting peak homebuying age (early 30s). This is in sharp contrast to the 2008 housing meltdown when homebuying demographics hit all-time lows.”
- Low interest rates: Today’s market also is bolstered by near historic low interest rates. If/when that changes, we might be telling a different story. Higher interest rates could exclude some buyers from the housing market, affecting the supply/demand ratio we mentioned earlier.
Some Abio clients who are suffering from sticker shock and bidding-war burnout decided to drop out for a while, just in case this is a bubble. If it bursts, they reason, prices will drop and they’ll finally get their shot at homeownership.
That doesn’t seem to be the case for now. Of course (here comes the caveat), we don’t have a crystal ball and can’t predict the future. Real estate is our superpower, not clairvoyance. If only!
In other news… Open houses are back
Open houses are open for the first time in more than a year! We can attest that buyers are thrilled to walk through homes again without jumping through hoops to schedule private tours.
“Any opportunity for a buyer to access a home helps,” says Abio agent Krista Miller. “Is it needed? No. But it helps.”
Abio agent Larry Jacobs added, “Especially if they are in an area with multiple open houses. Buyers can make spur-of-the-moment visits they may not have the opportunity otherwise.”
From the seller’s standpoint, open houses might not affect their bottom line (how fast a home sells and for how much money). As we saw this last year, the prohibition on open houses didn’t stop properties from “flying off the shelves” with astonishing speed and prices.
Here’s what to expect if you stop by an open house, according to California Department of Public Health guidance:
- Physical distancing must be maintained.
- Face coverings are required.
- All persons entering will be asked to sign in.
- People who feel sick or have COVID-19 symptoms may not participate.
- Hand sanitizer should be made available.
- Doors and windows should also be kept open when possible for proper air circulation.
- High-touch surfaces should be cleaned at least once a day.
What’s happening in your city?
The following sales data is for detached single-family homes. Sources: Bay East Assoc. of Realtors and Contra Costa Assoc. of Realtors.
Alameda County Home Sales – May
Contra Costa Home Sales – May
Don’t see your city of interest here? Get in touch and we’ll dig up those numbers for you. 888-400-ABIO (2246) or email@example.com.