Market Health

Is the Real Estate Boom a Bubble Ready to Burst?

Buying a house or condo is a great way to diversify an investment portfolio.

But for the past several years, the real estate market has been a challenging place for buyers.

The lack of available homes was a problem even before the pandemic hit. And COVID-19 has only made it worse.

Home prices are at all-time highs, and the market has never been more competitive.

So now we have to ask this: Is a housing bubble imminent? And if it is, when will it pop?

A Recipe for Trouble

Many of today’s buyers are purchasing properties to take advantage of ridiculously low interest rates on mortgages. Others see the pandemic-induced work-from-home culture as a reason to invest in their homes.

This increase in demand has driven prices higher. Bidding wars are more common than they’ve ever been, especially in desirable areas.

This has led some buyers to waive home inspections, which is something that never happens in a normal market. And some buyers are making offers in cash – for above the list price!

Now, there’s a simple reason this is happening. In the U.S., the supply of available homes is 5.24 million houses short of what is needed.

Workers haven’t been able to build houses fast enough. And supply chain issues have also hit the homebuilding sector.

In fact, contractors are paying 23% more for materials than they did last year. That makes it more difficult to build.

To top it all off, builders are facing a lack of labor. So far, only 80% of homebuilder jobs lost during the pandemic have been refilled.

Ready to Burst?

The short answer is no, I do not believe a housing bubble is in the near future. The housing market is certainly in a boom, but it has already shown signs of slowing down.

For a bubble to burst, two things have to occur.

Demand has to dramatically decrease, and supply has to dramatically increase. And neither of these things is going to happen anytime soon.

However, not everyone shares my viewpoint.

Peter Boockvar, a well-known investor and the chief investment officer at Bleakley Financial Group, suggested back in August that a housing bubble was imminent. He thought first-time homebuyers were at great risk of getting burned.

He claimed that when the next bubble bursts, new buyers would lose all the equity in their homes.

Now, if there were a bubble and it burst, that would be true. But this isn’t a bubble.

Demand is slacking off a little, but it’s still there. And the shortage of available homes isn’t going to improve for years.

It’s hard to find others who share Boockvar’s view that a housing crisis is just around the corner. (In his defense, no one could have predicted what happened in 2008 either.)

Still, there are a few concerns to keep an eye on.

Back in 2005, before the last bubble burst, housing prices saw a 14.4% year-over-year gain.

Year-over-year price increases today are at 19.9%. They’ve been setting new records every month since April.

And Goldman Sachs forecasts prices will rise another 16% by the end of next year. There’s no question that higher prices will eventually slow demand, even with today’s low interest rates.

To Buy or Not to Buy?

As I said above, I don’t believe we’re in a housing bubble. But I certainly believe that we are in a housing boom.

Now, housing prices will eventually correct and drop. This could even happen in the latter part of next year.

If you are a first-time homebuyer and can wait, you’ll likely get a better deal a year from now.

The downside is you might pay a mortgage with a higher interest rate. But as the old saying goes, when it comes to real estate, they’re not making any more of it.

Remember, things are different from how they were in 2008. Prices will eventually correct, and we could see a drop of 5% to 10% going into 2023.

But prices won’t be dropping anywhere close to the dramatic 26% they did back in 2007.

So don’t panic… I don’t think we’re in for a real estate crisis anytime soon.

Good investing,

Dave

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