Buyers are overpaying, but are there signs of a bubble?

As prices continue to soar, Housing Wire asks the question: Are there signs of a bubble?

“The national average of home prices rose 14.4% year-over-year to $336,200 in February – the largest increase since July 2013, according to the latest report from Redfin. As proof of the impact of the country’s low inventory and high cost of building materials, new listings fell 16% – the second-largest decline on record since Redfin’s data began in 2012, only passed by the drop in April 2020.

Mortgage rates have also jumped to north of 3%; at its current pace, the Mortgage Bankers Association is forecasting rates will reach nearly 3.5% by the end of 2021. New home applications are down as well, as builders are still struggling with smaller-than-normal crews and expensive materials that are hard to procure. And even with March well underway, mortgage applications are still in decline.”

Redfin’s chief economist makes the profound comment that : “It seems like the only move-up buyers who are confident enough to list their homes are those who are relocating to a more affordable area where they’ll have an edge on the local competition.”

I can confirm that as I was talking just yesterday to an agent whose client with a $2 million house won’t list it because “she cannot find anything to buy.”

But to come back to the question in this article: are we in a bubble?

According to Investopedia, the term “bubble,” in an economic context, “generally refers to a situation where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin.”

Ah yes, but what is a house’s fundamental value?

In general, of course, bubbles can really only be identified after the fact.

Federal Reserve chairman Alan Greenspan is famous for the expression “Irrational exuberance” which he used in a speech during the dot-com bubble of the 1990s. The phrase was interpreted as a warning that the stock market might be overvalued. But what he actually said was: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions….?”

How indeed.

According to “If there is a current-day bubble, it bears little resemblance to the gigantic bubble created by subprime mortgages, which burst into the Great Recession. Then came the mass foreclosures, plummeting home values, and the scores of homeowners suddenly underwater on their mortgages.

This year’s sky-high prices are driven by a rush of buyers competing for a very limited supply of properties. More demand than supply equals higher prices.

In the aftermath of the housing bust, it’s become harder for buyers without good jobs and strong credit to score mortgages. This weeds out riskier borrowers. And unlike the last go-around, when builders were erecting residences at what seemed like a break-neck pace, the under-building of the last few years has exacerbated the housing shortage.”

“Experts” expect demand to settle down as mortgage rates rise. But the continued vaccine rollout and stimulus money from President Joseph Biden’s American Rescue Plan could keep buyer demand high for a while longer, according to Housing Wire.

The last year has deepened the divide between the “have’s” and the “have not’s. While the latter have suffered greatly, the former – and here I am talking only financially not from a health point of view – have seen their home prices soar along with the stock market. We are rapidly approaching mass vaccination levels which will allow some semblance of normal life – or at least the new normal – to return this summer. And there is a lot of cash waiting to be spent as savings have climbed over the last year.

And then there is the American Rescue Plan on top of that, pumping a vast amount into the economy, some immediately and some over a longer period. Forecasts of GDP growth this year seem to be increasing almost daily, with numbers of 7% or even 8% being whispered. What fascinates me as a mathematician is that I have yet to hear on a financial channel any commentator add: “but bear in mind GDP dropped 3.5% in 2020, so a 7% increase from the 2020 level would produce GDP only 3.2% higher than in 2019.” But it will still be a spectacular year and may well herald above trend growth for a few years to come..

Oh, and then there is the long overdue infrastructure bill that may be passed this year as well.

Mortgage rates are rising- read my Goodbye sub 3% mortgages – to levels last seen in – gulp, July last year. During the boom years of 2000-2006 the 30-year Fixed Rate Mortgage was mostly between 6% and 8%, so it is hard to imagine that 3.5% or 4% is going to stifle this market, especially with the much more stringent mortgage requirements post the Great Recession.

For the most part, the buyers in recent months have been people who want to live in their new homes. This is so unlike the HGTV-encouraged “buy 3 homes and flip them” go-go days of the early 2000s.

Finally, let me point out that Greenspan made his irrational exuberance comment in 1996 and the bubble did not burst until 2000.

Yes, the housing market is booming, but IMO it is not in a bubble.

Read these articles:
It’s 80 degrees in Florida….
Goodbye sub 3% mortgages
Is Tom Brady staying in Florida?

Andrew Oliver
Sales Associate | Market Analyst |

Naples, Bonita Springs and Fort Myers
m. 617.834.8205

Market Analyst | Team Harborside |
Sagan Harborside Sotheby’s International Realty
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