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Are we in a real estate bubble? – KLAS – 8 News Now

(NEXSTAR) – At the end of 2021, home prices were 18.5% higher than they had been just a year before, according to CoreLogic. And just when you think prices couldn’t possibly get any higher, they have. In January 2022, home prices climbed yet again as home inventory reached a record low, according to the National Association for Realtors. The median price of a home has topped $350,000 nationally.

With astronomical numbers like that, it’s hard to believe this isn’t a housing bubble, but real estate analysts agree it’s not. Here’s what’s really going on.

What is a housing bubble (and how is this different)?

A housing bubble is characterized by a significant spike in house prices that isn’t related to other economic fundamentals, like labor markets, income or wealth, explained Stuart Gabriel, professor and director of UCLA’s Ziman Center for Real Estate.

We’ve certainly seen the first part of that definition – a significant spike in house prices – but there are clear economic factors driving those increases, Gabriel said, citing a variety of pandemic side-effects:

“Very significant purchase of second homes by those that could afford it… and in the early stages of the pandemic, city dwellers in high-density units sought refuge in suburban or exurban environments that had greater separation between households, lower densities, more recreational amenities that were consistent with pandemic safety and things of that sort.”

Basically, the pandemic fueled a lifestyle demand for home ownership. Combine that with super-low interest rates, and prices started to climb – and still haven’t stopped.

There has been some speculative home buying, Gabriel acknowledged, like house flipping in hot markets. Still, he said that doesn’t accurately the “vast majority” of activity in the housing market, which leads him to believe there’s no bubble here.

Are home prices going to drop?

“Just because we don’t believe we’re in the midst of a speculative bubble doesn’t mean that house prices can’t go down,” Stuart said. “And in fact, you know, one of the one of the chance you’ll get very significant amount of housing demand in recent years has been record-low mortgage interest rates and the availability of cheap credit.”

Those rates are set to change as the Federal Reserve looks to curb inflation in 2022. Higher mortgage interest rates will make home ownership more expensive, which should cool the trend of skyrocketing home prices, Stuart said. But he stopped short of predicting a big fall.

“There’s still very, very high levels of demand for anything that’s affordable,” Stuart said. “We just have such a shortage of housing supply, especially affordable housing supply, that units are going to continue to come at a premium.”



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