Is housing in a bubble?


Russell Price, Chief Economist – Ameriprise Financial

Row of new suburban houses being built

Home prices have been rising at a fast pace over the last year. According to the Federal Housing Finance Agency (FHFA), the average selling price of an existing home grew by 20% from August 2020 to August 2021, reaching a record $348,000. Notably, that pace of price appreciation is nearly double that of the year-over-year gains seen during the housing bubble years of 2005 through 2008.

Today’s housing market is very different than that period, however. The speculation and bad loans that drove home sales and prices into an artificially inflated, unstainable bubble during that prior experience are not factors today. Today, market prices are being driven mainly by limited availability.

 

A seller’s market

According to the National Association of Realtors’ (NAR), there were 1.1 million existing homes available for sale across the U.S. in September — materially fewer than any other September since at least 1982.

Existing homes for sale vs. total U.S. population line graph

By comparison, there were 1.6 million homes for sale in September 2019 (the year prior to the pandemic) and 3.3 million homes for sale in September 2007, near the peak of the housing bubble, according to the NAR.

 

Are home prices at risk of crashing from such high levels?

It may take years for housing availability to improve, in our opinion. We believe the limited supply is likely to offer support to strong housing prices for quite some time. Unfortunately for potential new buyers, especially first-time buyers, availability is especially limited in the more affordable price segments.

For example, in September, sales of homes priced at $250,000 and below were down 22% year-over-year and accounted for about 29% of all sales, according to the NAR. The decline in transactions is not due to lack of demand. Rather, it’s a lack of availability and properties appreciating into higher price ranges, in our view.

Conversely, sales of properties priced at $750,000 to more than $1 million were 40% higher year-over-year and accounted for about 12% of all transactions. As a point of comparison, in August 2017, homes in that range accounted for just 5.4% of sales, according to the NAR.

 

A positive note for prospective buyers

Strong market conditions combined with falling COVID-19 risks have slowly enticed more homes to the market in recent months. Builders have also increased the pace of new construction, but after more than a decade of under-producing relative to population growth, we believe it could take years for the new-homes market to once again be seen as balanced.

 

Housing is key to building wealth

For the majority of U.S. households, a home is the largest source of wealth. According to the Federal Reserve’s Survey of Consumer Finances, 64.9% of households in 2019 lived in a property they owned outright or for which they paid a mortgage.

Individuals owned 67.7% of household equity at the end of this year’s second quarter, up 15 percentage points from their 52.7% ownership stake at the onset of the Great Recession in first quarter 2008. At the end of second quarter 2021, the Fed estimated U.S. residential property to be worth approximately $26.3 trillion.

Owners' equity in real estate line graph

 

Summary

We believe a seller’s market is likely to remain over the next few years. Yet, the market is functioning as it should. During the housing bubble, rising prices led to even stronger demand as investors and speculators looked to flip homes for a fast profit. Today, when new home prices jumped in late spring 2021 due to a spike in lumber prices, demand cooled until lumber prices retreated — thus reacting as markets should.

Overall, housing fundamentals appear well supported by sound financing and the fact that housing demand still exceeds the available supply in many areas. Given housing is an important component of long-term financial planning, talk to your Ameriprise financial advisor to review your situation within the context of your long-term goals.