Is This A Housing Bubble?

Is this a housing bubble or is it just a housing shortage? The US is short about 5.5 million housing units to meet market demands.

By Ilyce Glink and Samuel J. Tamkin

In a typical year, the Spring housing market is hotter than the other part of the year. This means that more homes are bought and sold during the period of mid-January (when the Spring home buying market begins) through June, but not by much.

Traffic tends to be a little lower in other parts of the year. For example in the winter holiday seasons (Thanksgiving through New Years), but with nearly the same number of deals taking place. The thinking is that serious buyers are out and about, so they’re looking regardless of holidays celebrated or weather tolerated.

But as we push toward the beginning of the second half of the year, the real estate market is pushing ahead full-throttle, or at least it would be if there were enough homes to buy.

NAR estimates a shortage of between 5.5 and 6.8 million homes

There aren’t. Last week, we wrote about the National Association of Realtors’ latest report, Housing Is Critical Infrastructure: Social and Economic Benefits of Building More Housing, which suggested that a once-in-a-generation solution is required to help reduce the acute shortage of homes, now estimated to be anywhere from 5.5 million to 6.8 million.

As Lawrence Yun, chief economist of the National Association of Realtors, noted, “America is on track for only 1.6 million and 1.7 million new housing units this year and next, respectively. That would represent the best two-year performance in 15 years, yet it would still be inadequate.”

His analysis of housing costs is that short supply means home prices and rents will continue to rise.

This week’s numbers from Redfin seem to bear that out.

Homes are selling for amounts far above asking price

Redfin reported that more than 4,500 Seattle-area homes sold for at least $100,000 above list price in 2021. Last year, just 400 homes sold above list price. Powered by technology workers, whose stock holdings likely soared with the stock market, 580 homes sold for more than $300,000 above list price.

In a Redfin press release announcing the numbers, Seattle-area Redfin agent Scott Petrich said he had never seen anything like the current local housing market.

“It’s fueled by employees of local tech companies like Amazon and Microsoft and companies with big offices in the area like Google and Facebook,” he said. “A lot of them didn’t want to work remotely during the pandemic in small apartments, and that pushed them to seek out large homes with office spaces. Most of those people have the money to compete with other buyers and drive up prices.”

While it sounds extreme, what’s going on in Seattle is happening in most major metropolitan markets. Median home price jumped 22 percent from a year ago, according to ATTOM Data , and home-price appreciation was greater than annualized wage growth in the second quarter of 2021 in 72 percent of the counties analyzed, most notably in Los Angeles County, CA, Harris County (Houston), TX; Maricopa County (Phoenix), AZ; San Diego County, CA, and Orange County, CA (outside Los Angeles).

Even with interest rates near all-time lows, the current market shuts out first-time buyers from home buying opportunities. ATTOM Data reported that historic affordability dropped in two-thirds of the housing markets. Cash or like-cash offers (those without a financing contingency) are being accepted over offers that require mortgage approval. Given that first-time buyers typically have little cash for a down payment, competing with a cash offer is tough.

Will housing supply catch up to demand?

Those concerned about a housing bubble should pay heed to Yun’s belief that it will take years for the housing market’s supply to catch up with demand. Sometimes you don’t know if this is a housing bubble until it’s too late. You can see Ilyce’s videos on the real estate market from 2005 to 2007 on her YouTube channel. Unless interest rates rise dramatically, dampening demand which would shut down – or perhaps reverse – price appreciation, expect to see home prices continue to rise and first-time home buyers increasingly locked out of homeownership opportunities.

©2021 by Ilyce Glink and Samuel J. Tamkin