Housing Prices in 2021: Why It Might Not Be a Bubble

Author’s note: The following is an older blog post of mine. Please visit my blog here for all things leadership, business, and cryptocurrency related.

As the coronavirus pandemic spread across the United States, housing prices rose rapidly. From March 2020 to this September, the median home listing price increased by 23 percent.

New remote work opportunities and lower interest rates have made home ownership an appealing prospect, but some worry this sudden seller’s market is a bubble prone to pop. However, many experts from a range of relevant fields disagree.

Key Differences from the 2008 Bubble

The housing bubble that led to the Great Recession in 2008 was defined by low lending standards, oversaturated supply, and a departure from fundamentals. Prices no longer reflected the fundamentals of houses on the market, such as their square footage, architectural details, and proximity to attractive jobs, school districts, and cultural hubs. This combination played a major role in the subprime mortgage crisis.

An inverse set of factors are at play this time around, The Wall Street Journal reported in February. Mortgage lenders have implemented stricter qualification processes, supply is dwindling, and prices match demand. As reporter Nicole Friedman wrote:

Homebuying demand is so high that many builders are limiting the number of homes they sell at a time, to ensure they don’t sell more than they can build. They are also raising prices.

Simply put, the pandemic gave buyers a push to seek larger homes in less-crowded areas.

Effects of the Current Housing Boom

Joshua Pollard calls this part of a “Brave New Housing Cycle” that will last seven to ten years, rather than the usual five. “The current Brave New Housing Cycle actually started last year,” Pollard, the founder of Omicelo, a real estate investment firm, wrote for Forbes in February 2021. “Consider recently released data from the National Association of Realtors that showed sales of previously owned homes in 2020 were at the highest level since 2006.”

Recent attention-grabbing headlines about overpricing are largely outliers. For instance, a home in the Bay Area sold for nearly $1 million despite being gutted by fire, the Los Angeles Times reported. But its fundamentals — nearby hiking trails, a nice neighborhood, and good schools — meant the house remained a valuable investment. Its price tag was also significantly lower than standard asking prices in the area, which climb to $2.1 million.

In the past two decades, the creation of new housing units has actually lagged behind national demands by 5.5 million, according to the National Association of Realtors. Home-building is slowly catching up, creating new jobs and a new source of revenue for developers and investors.

Not a Bubble, but a Plateau

While an eventual price decrease is inevitable, it will probably be part of the typical economic cycle. Tabitha Mazarra, who works for the mortgage lender mBanc, attributes rising costs to increased housing needs by qualified buyers. “What’s different today from what we saw in 2008 is that people who are qualifying for loans are actually qualified,” Mazarra told GoBankingRates. “They are creditworthy. We’re in the situation we are now because of simple supply and demand.”

Erik Wright, CEO of New Horizon Homebuyers, senses a reversal will be gradual. “I am expecting the market to begin to cool off but for it to be more of a plateau than a crash.”

Other experts agree. Millennials — the largest demographic in the U.S. as of 2019 — are driving demand, according to Ben Carlson, a director at Ritholtz Wealth Management. “A combination of the pandemic, remote work and low interest rates have all pushed even more people to start buying houses,” Carlson wrote in Fortune. “Just because prices are rising does not automatically make something a bubble. Sometimes prices rise for good reasons.”

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