Homebuyers may worry the market is entering a real estate bubble due to record high housing prices, low inventory, and the prevalence of bidding wars. However, after surpassing the “mid-2000s housing-bubble high watermark of 11.9%” in April of 2021, economists predict the real estate market is heading toward more balanced conditions.
Read on to learn what is actually happening in the housing market and how fearing a real estate bubble might make the situation worse.
What is a Real Estate Bubble?
A real estate bubble, also known as a housing bubble, occurs when demand for real estate exceeds supply. This unbalance causes the average price of properties to increase.
Real estate bubbles are typically associated with unexpected or unusual spikes in housing demand. When this growth in demand occurs, buyers are left with limited options. This limitation allows homeowners to sell their properties at a higher cost.
What Causes a Real Estate Bubble?
Real estate bubbles can be caused or influenced by a variety of factors. For example, these factors may include:
- Rising economic activity or prosperity
- Low-interest rates
- Increased access to credit
- A population increase in a particular area
- Spikes in flipping properties
Additionally, investors may contribute to a real estate bubble as they bid up properties to invest in or flip. These high bids cause the prices of real estate to rise, creating artificial demand. The main risk of a housing bubble is that it will eventually “pop.”
Are We in a Real Estate Bubble?
While increased costs may be pricing out some potential buyers, the real estate market is not in a bubble. According to TheStreet, economists have made this conclusion based on the fact that the real estate market is not consistent with the characteristics of a typical real estate bubble, such as prices increasing as a result of artificial demand.
In fact, Zillow claims that acting in response to housing bubble fears could make the situation worse. Here’s how.
How Can Fearing a Real Estate Bubble Increase Prices?
Take it from Zillow economists:
“The expectation of another [housing] crash could contribute to keeping homes so unaffordable. Builders have been firing on all cylinders, and with more homes under construction than any time since 1973, they understandably feel exposed in the event of a housing downturn.
“If they trim their construction plans out of caution, we will miss out on one of the best hopes we have for net new inventory on the market, and the inventory crunch that’s helped push prices up will persist for longer than expected.”
Simply put, homeowners and builders acting out of housing bubble fear could cause a decrease in the production of inventory. Since buyers already outnumber the properties for sale, suppressed production of inventory could cause the high prices and bidding wars to continue.
Let’s take a look at what is actually happening in the real estate market.
Why are Prices High in the Real Estate Market?
The market is affected by a significant rise in demand–not artificial demand– and a lack of inventory.
This rise in demand may have been caused by factors such as:
- Millennials attempting to buy their first homes
- Pandemic-related adjustments surrounding remote work (i.e. individuals away from their employers)
Let’s Talk About the Elephant in the Room: The 2008 Crash
Conversations surrounding fears of the housing bubble often include whispers of the financial crisis of 2008.
The real estate bubble of 2008 resulted in housing prices significantly dropping—approximately 12.4% during the fourth quarter of 2008, according to The National Association of Realtors (NAR), which was then followed by a devastating foreclosure crisis.
Buyers, however, should be relieved to know that economists state the current rise in prices is not leading to a similar crisis. In fact, modern buyers are, on average, more financially prepared to endure a financial crisis or drop than the buyers of 2008.
The Good News: Real Estate Inventory Is Rising
Following a period of low inventory and high prices, real estate inventory began to rise in March of 2022.
According to Zillow, this rise is not only consistent with “seasonal trends but increasing enough to begin closing the gap with inventory levels of a year ago. It now looks likely that inventory will notch year-over-year growth [in late 2022] which hasn’t occurred since September 2019.”
How Will More Inventory Improve the Real Estate Market?
A rise in inventory will result in a more balanced housing market.
Homebuyers will have more options, which will increase competition among sellers. This competition will make purchasing properties easier for homebuyers. We can anticipate fewer bidding wars and decreased overpricing.
However, inventory may take up to 30 months to reach 2019 levels, so buyers should expect a gradual increase in inventory into September of 2024, if current estimates prove to be accurate.
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