The parallels between the last real estate run and this are hard to ignore; the record prices, the bidding wars, warehouses being leased before they’re built, the off-market transactions that take place before anyone even knows the buyer/seller were even in the market. Today’s real estate market feels a lot like the bubble market circa 2006. The numbers just don’t make sense. How do you make a rational offer on a property when you have irrational buyers with irrational capital in the game?
So are we in a bubble or not? The real question is, who cares, and why? Conservative/timid buyers, shell shocked by the bursting of prior bubbles, are stockpiling cash and holding out for this bubble to burst. When the last one burst, it triggered a global financial crisis and what at the time was the deepest economic downturn since the Great Depression. In order to determine whether the U.S. market is due for a correction, requires digging into a multitude of factors – from interest rates and supply/demand to the output of lumber and steel mills. Unfortunately, it is nearly impossible to gauge which direction those signals are pointing.
While the last bubble was created and ultimately burst by improper lending practices, The Dodd-Frank Act hopefully set forth proper guidelines to prevent that from happening again. Therefore, while real estate prices could flatten in the next few years, the conditions for another crash similar to the most recent, are absent. In lieu of easy credit or illegal lending practices, the main factors in the current price runup are tight supply and strong demand, both of which are likely to continue for the foreseeable future.
Right now, the biggest threat to the market is a sharp or unexpected increase in the current ultralow mortgage rates, which have moderated, (or some may say caused) the impact of rising prices. This is not a looming risk, though. The Federal Reserve has bought almost $1 trillion in mortgage-backed securities to keep mortgage rates down since resuming its purchases in March 2020 and doesn’t plan to stop anytime soon. The Mortgage Bankers Association predicts the rate on the average 30-year fixed-rate mortgage will rise from 3.1% this quarter, to 3.5% at the end of 2021, and 4.2% at the end of 2022.
Millennials are today’s largest generation and they are reaching their peak purchasing years. This generation will be in the market for all types of goods including real estate, which will further demand in this already low supply market. The pandemic, widely recognized as the culprit of the short supply of goods, and in turn creating the largest inflation imprint in recent years, has resulted in high building material prices, largely attributed to last year’s mill shutdowns. These increased costs not only make it more expensive for new construction, but the increase trickles down to existing products, as consumers flee to more affordable and existing options.
Truth be told, whether we are in a bubble or not, it should not be the reason to purchase or not purchase real estate. If interest rates rise, then by default, prices will eventually come down. If demand slows down, so will pricing, and likely so will your desire to invest. In the end, consumers will buy when it is their time to buy, regardless of the market conditions. The one constant that remains is that consumers will spend what they can afford, and at some point, this market will flatten or correct, but unlikely to crash or burst.