Are we headed for a Real Estate Bubble?

The Real Estate Market and Home Prices have been on fire 🔥 for the past couple of years.  People are asking “when will the housing market crash?”  Is there any truth to that?

The COVID-19 pandemic created a supply and demand issue in real estate as well as many other items that we use every day.

Housing Market Demand

Consumers now have the ability to work from home and they are seeking homes that are more comfortable and desirable for this purpose.  The past 2 years have buyers fighting for homes that love, paying well over asking price.  This behavior has caused the housing market to appreciate at around 20% or more over the past 2 years.  Due to low inventory buyer demand for homes has not subsided.  Homes have been selling for well above asking prices and above appraisal price.

Interest rates effects on housing

The housing market is starting to change.  Interest rates have increased from below 3% to above 5% since the beginning of the year.  The increase in rates has reduced the buying power of many would be homebuyers.  The increase in interest rates is causing housing demand to slow.  Housing inventory is starting to grow due to lower demand and affordability for some home buyers.  Interest rates are starting to have an effect on home absorption rate (how fast homes are selling).  The absorption rate has fallen from about 200% at the beginning of the year to just under 90% at the end of May 2022.   The San Diego housing market is still very strong due to the desirability of the area and historically low inventory.

What experts are saying

Consumers are asking “When will the housing market crash?”  Many buyers have been sitting on the fence waiting for the housing market to crash so that they can afford to get back in.  Realtor.com is talking about the question – “Is another housing bubble brewing?” The opinion of different economists in this article point to a correction, not a crash.  Buyers are still able and willing to buy even though their monthly mortgage payments are increasing hundreds of dollars every month even with recent interest rate increases.

Forbes has also written an article “Will the housing market crash? Experts Give 5-Year Predictions”  The experts in this article indicate that demand will remain strong with millennials and Gen Z accounting for more than 30% of the buyers in the market.  They also cited that inventory remains historically low and the number of homes for sale would have to increase substantially in order for prices to fall.

What will happen

There are many factors that influence the housing market.  The likelihood of another Great Recession is unlikely.  The Great Recession was caused by a loose mortgage underwriting system.  Current and recent homebuyers had much more strict qualifications in order to buy homes with a mortgage.  Another wave of foreclosures is unlikely since homeowners equity has grown significantly in the past several years.  Recent homebuyers have more at risk and are unlikely to just walk away from their housing investment.

There are murmurs of a recession.  Inflation has been well above the 2% benchmark that the government likes to see to keep the economy healthy.  With consumer costs rising, there is less money for people to spend and they may need to tighten their budgets.

Ultimately, at this point the housing market will slow in the near future and it’s already showing those signs.  A crash is unlikely due to the lack of inventory.  New home construction is still well below what is necessary to fulfill demand. The true crisis and driving force in the real estate market is the lack of inventory.

Being a homeowner is still one of the best investments available.  You should consider how long you plan to spend in a home before purchasing.  If only for a few years, that is when it could possibly be risky.

Whether you are planning to buy or sell a home in the current housing market, current indicators point to a safe bet.  With housing demand remaining strong, it appears that home appreciation will continue.  It may not experience record appreciation as it has in the past few years.  It will remain a good long term investment as since recorded home appreciation has averaged about 4%.

Thinking about becoming a homeowner? Find your next home here

Thinking about selling?  What is my home worth today?