Are We In a Housing Bubble? Will the Housing Market Crash in 2021?
Today’s housing market is fierce! Due to remote work and record-low mortgage rates, Americans are relocating and purchasing homes at an all-time high. However, there is a major problem – there aren’t nearly as many homes for sale as there are buyers. And this severe housing shortage is fueling record-high prices and cutthroat competition.
With the red-hot real estate market we’re experiencing, many consumers are understandably concerned. The soaring home prices and a lack of homes for sale may feel eerily similar to the 2007 housing bubble that led to The Great Recession.
So, is there a reason to worry? Are we in a housing bubble and headed for another housing market crash? Let’s take a look.
What is a housing bubble?
Before we jump into our current situation, let’s first take a look at what a housing bubble actually is. Also known as a real estate bubble, a housing bubble occurs when home prices rise at a rapid rate to a level of instability. Housing bubbles generally begin when there is a shortage of inventory and an increase in demand in a market. As the prices start rising, speculation begins to take effect. Consumers expect prices to increase further, so everyone wants to buy a home as quickly as possible. This drives up demand further and prices continue to skyrocket.
As we know from physics, what goes up must come down. So at some point, the steep housing prices become unsustainable and homes become overvalued. When this happens, demand begins to decrease and therefore, supply starts to rise. Suddenly, we’re in a situation where there are more homes for sale than prospective buyers. As a result, housing prices can fall drastically – and the bubble bursts.
What leads to a housing bubble?
Bubbles are a phenomenon that can happen in just about any industry, whether it’s homes, stocks, or gold. Traditionally, bubbles don’t often occur in the housing market because of the large financial responsibility associated with purchasing a home. However, with the right combination of factors, a housing bubble can begin. Here are several situations and variables that can occur, drive up demand, and lead to a housing bubble.
- A rise in economic activity. When the economy is doing generally well, people have more disposable income to spend on housing.
- Low mortgage interest rates. This puts homeownership within reach for many hopeful homebuyers.
- Loose mortgage lending practices. This is a major factor that led to The Great Recession as many lenders offered home loans to homebuyers without regard for their ability to repay.
- New mortgage products. Specifically, those allowing the buyer to make low monthly payments. This can make the idea of homeownership appear more affordable than it actually is.
- A sudden increase in migration. For example, if a large group of homebuyers relocates from San Francisco, CA to Austin, TX – this will increase demand and shrink supply in Austin, driving prices up further.
- The time it takes to build a house. It generally takes a long time to build a new home which makes supply slow to respond to dramatic increases in demand.
- Speculative and risky behavior. This can lead to more property investors entering the market, along with homebuyers who can’t afford the homes they are purchasing.
What happens when housing bubbles burst?
Housing bubbles can cause major problems in the larger economy. Once the bubble bursts, many people may realize that they have borrowed more than their home is worth and could struggle to keep up with their house payments if they lose their job or find themselves in other financial trouble. This can lead to foreclosures and a loss of financial security across the board. However, if a homeowner maintains a steady income, they should still be able to make mortgage payments and hold onto their home even if their home goes down in value.
Are we in a housing bubble now?
So, will the increase in prices and shortage of housing inventory result in a housing market crash in 2021? Most experts don’t think so.
The circumstances influencing the housing market today are different than those of the 2006-2007 housing bubble. The bubble that eventually led to The Great Recession was primarily a result of irresponsible lending. Just about anyone who wanted a mortgage could get one, even if they didn’t have the income to afford it. However, this time mortgage requirements are stricter and the current demand isn’t caused by reckless lending. It’s the result of true supply and demand.
“I wouldn’t call this a housing bubble because the demand for homes is truly there and the buyers can afford these high prices,” said Redfin Chief Economist Daryl Fairweather. “Bubbles burst; I don’t see that happening.”
Instead, Fairweather believes that as the U.S. reaches herd immunity from COVID-19 and the economy rebounds, the demand and home prices will slowly begin to come down. “That’s because mortgage rates will make buying a home more expensive, and Americans will have more options for how to spend their money. Instead of spending on homes, Americans will want to spend on activities like vacations, parties, and dining.”
What should you do if you’re buying a house right now?
While no one can say for sure what will happen with the housing market, it’s important to be prepared if you are currently buying a home. The most important takeaway, if you are currently house-hunting, is don’t buy more than you can’t afford.
Right now, bidding wars are at an all-time high and buyers are paying well over asking to secure a home. So before embarking on the homebuying process, we recommend using an affordability calculator to help you determine your budget. This can help you set expectations ahead of time, so you know what you can offer and when to walk away.
It’s also important to work with a real estate agent who has your best interest in mind and a deep understanding of current market conditions. They can help you navigate the ins and outs of this tricky seller’s market.
Redfin does not provide legal or financial advice. This article is for informational purposes only and is not a substitute for professional advice from a licensed attorney or financial advisor.