Today’s Soaring Home Prices – While Challenging – are Likely Not a Housing Bubble
July 2, 2021
4 min read

Is the US residential real estate market currently experiencing another housing bubble? That is one of the most frequent questions that we get from current and potential investors. It is understandable why so many people are asking the question. Most people have a friend or family member that has struggled to find a new home to buy or rent. In addition, the frenzied state of the US residential housing market is a daily headline on both local and national news media outlets. 

Unfortunately, the answer to that question is not completely straightforward. Certainly, many would-be homebuyers and renters are experiencing serious challenges that would lead them to believe that the market is in fact a bubble. A recent article in Vox.com took on this issue. As stated in the article, “The last crisis, when a housing bubble and risky behavior by Wall Street took the blame for the Great Recession, looms large in our collective memories. It’s unsurprising, then, that the questions “are we in a housing bubble?” and “will the housing market crash?” saw a “tremendous increase” over the last 12 months, according to Google Search.” However, we believe that while certain aspects of the residential housing market certainly seem frothy, the fundamentals of the current market point to a vast undersupply of housing, not a housing bubble like the one experienced in 2005/2006.

Anyone that has been in the market recently to either buy or rent a residential home is running up against unprecedented demand. Soaring prices, bidding wars, homes selling far above asking price, and long lines to view properties are all commonplace. As detailed in the article, “More than half of homes in the US are selling above list price. CoreLogic’s index, a leading measure of US home prices, recorded a 13 percent annual gain, the highest since February 2006. People are playing a lottery to see if they’ll win the honor of spending hundreds of thousands of dollars to build a home. Would-be homeowners are furious as they lose bidding war after bidding war. And roughly two-thirds of people who bought a home in 2020 made an offer on a house that they had never seen in person.” Without question, this homebuyer behavior is not normal, and is most likely not sustainable. If we were to concern ourselves only with consumer behavior, the current market might convince some that this is a bubble market. 

However, are these indicators of a bubble in housing, and should real estate investors expect a subsequent crash in housing as they experienced in 2008/2009? In order to answer that, it is important to first understand the nature of ‘investment bubbles’. Soaring demand and increasing prices in and of themselves do not always indicate a bubble. Economists still disagree over the exact causes of a bubble (and likely always will). However, most economists would agree that the answer can be found in understanding the market’s supply/demand dynamics. As stated in the article, “In general, what people are looking for to determine if there might be a bubble in housing is that the fast price appreciation is detached in at least some ways from the fundamental reasons why prices increase or decrease normally (like supply or demand).”

In taking a more sober look at the current supply/demand state of the residential market, it quickly becomes clear that the main culprit of this current market is the supply. From the article, “The case against calling this a bubble is pretty straightforward. Prices are rising primarily due to low supply. That’s paired with the demographics of the nation, which predict a huge surge in demand as millennials age into the prime home buying years. As the National Association of Realtors reported, millennial buyers make up the largest share of homebuyers at 37 percent. It’s no surprise that, as they reached the age when people generally begin buying homes, there would be a sharp increase in demand.” 

As we have discussed at length over the past year, there are several reasons why the residential real estate market is experiencing such an acute shortage of homes. Home builders severely cut back new construction following the financial crisis of 2008/2009. Millennials began entering the home buying market in greater numbers over the past several years. Finally, the COVID19 crisis caused many homeowners to remain longer in their current home than they may otherwise have. All of these factors have combined to create the current ‘supply crisis’.

Ultimately, there is only one real option for the residential market to become more sustainable over the long run. The supply of homes for sale and rent – both existing homes and new construction – must increase in order to satisfy the surge in demand. Most likely, this will not happen quickly. 

Not only will builders need to increase the pace of construction, but government municipalities will need to acknowledge the higher levels of demand as well. In order for this to happen, local and state zoning policies will need to quickly adjust in order to accommodate a greater supply of housing. As described in the article, “The nation’s historical failure to build enough homes is not due to resource constraints but due to onerous regulations at the local level that have restricted the supply of housing in job-rich centers. The US needs to build enough housing to support the number of people who need a place to live. And to do that, it needs to change local zoning laws that seek to prop up current homeowners’ investments by preventing more dense housing from being built. If it doesn’t, prices will continue to rise. This is a crisis of our own making.” 

The current US residential housing market is a tale of the have and have-nots. If you are looking to rent or buy a home in this market, you are in for significant challenges. If you are a homeowner or own rental property – you are in a very enviable position as you see the value of your home continue to increase. While it is understandable to see soaring home prices and liken the situation to the housing bubble of 2005/2006, we do not believe that the evidence supports this notion. We see a market severely unbalanced on the supply side. It will take some time for this imbalance to work itself out. In the meantime, investors in residential housing are enjoying a market with strong underlying fundamentals.

Chris Jones
Chris Jones

Chris oversees business development, investor relations, and capital partnerships. With 25 years of experience in alternative investments, Chris has raised $250 million in assets. He’s served as Chief Compliance Officer, co-managed a Fund of Funds, and worked in operations and trading. Chris has been instrumental in growing four companies. Through firms like Sapourn Financial Services, Dekker Capital Management, and Diamond Peak Capital, he’s delivered solid absolute returns across varied market cycles.