Are We In A Housing Bubble?

Some of the questions we increasingly hear from home buyers and sellers we meet is “Are we in a real estate bubble?” and “Where is the real estate market heading?” These questions aren’t unique to the clients we work with either. According to Google Trends, searches using the term “are we in a housing bubble” are up 350% this past year alone. These are all good questions and let’s take a look at each in more detail:

ARE WE IN A REAL ESTATE BUBBLE?

When most people think of real estate bubbles, they naturally think of 2008 with the historic rise and fall of the housing market in the US – largely fueled by risky lending practices and highly leveraged buying and demand. Once the bubble burst, prices rapidly declined leading to the great recession…something we are still feeling the effects of even today.

Following the crash of 2008, home lending practices were further regulated, housing demand decreased and along with the decline in demand came a decline in all aspects of the real estate market including home builders, building supply chains, labor, permitting resources, etc. All this restriction in supply happened while our population steadily increased – and then a few more major events happened: namely a thriving national economy followed by a global pandemic.

COVID-19 led to many structural changes when people started to rethink where they wanted to live, how they could work, and what kind of a home they wanted to live in. While all this was happening, the federal government has pumped an unprecedented $5.5 trillion dollars into a $25 Trillion dollar economy leading many with memories and fears dating back to the days of the late 1970’s and hyperinflation. When people now see prices in housing, gas, groceries, automobiles, etc. all rapidly increasingly, it is hard to deny this possibility and as we have seen in the past, two of the most popular hedges against inflation have been equities and housing. Therefore, it should be no surprise that both are now at record highs.

So, does all this mean we are in a real estate bubble or does it mean something else? To help answer this question, Dave Ramsey, well known for his personal finance advise, recently indicated that the current imbalance between supply and demand for real estate is so severe that it could take years to come back into balance. His response to a recent caller about this topic was that “I do not think this is a bubble…and that would be the only way it would go down.”

Is Dave Ramsey right? That leads us to the next question…

WHERE IS THE REAL ESTATE MARKET HEADING?

“I think the craziness will slow and the rate of increase in prices will slow but I don’t think this is a false bubble that is going to course correct and prices are going to go down…dramatically anytime in the next decade. What that means is as you step out of the market, every day you wait to get back in the prices are going up” said Dave Ramsey in that same conversation. He then ended his conversation by saying that “it’s a good idea to sell now and buy now…because it’s an even swap. Your going to get the benefit of a heated market on the sale and have the problem of the heated market on the buy.”

Nobody knows for certain where the market will end up but people like Ramsey make a good point about the underlying factors of the real estate markets and how what is causing this current market run-up is very different than 2008. In the Arizona luxury market for example, many of the current buyers are from out-of-state, buying with cash, and want newer homes in ready-to-move-in condition. When these ideal houses become available, many are now privately listed (i.e. not yet on the MLS) and often result in bidding wars where the best “cash offer” often gets the deal. In these situations, buyers will forego appraisals that are commonly required by banks and therefore become the next and newest “comp” in the market. And for those purchases who do require an appraisal, even this can be a problem.

Just the other day an appraiser stopped by our open house and indicated that nearly half of the recent purchases in the Arcadia area were not to buy the home but rather to buy the dirt below it, scrap the old house off, and build a new one in it’s place. This means that the buyers will likely need to take another 2-3 years before they can even move into their new homes. And that assumes they are the ones moving in. As recently reported in the Wall Street Journal, in the nation’s top real estate markets, roughly one in every five homes now sold are to people/entities who will never move it. This means that in addition to other home buyers, you are also potentially bidding against flippers, builders, and “permanent capital” buyers…which is another name for long-term investors.

Of course all real estate is local and as we have previously written about, Arizona leads the nation in many of the “demand” factors adding to the argument that what we are experiencing from the growing “demand side” may continue for some time. Add to this economists who continue to expect rapid economic growth nationally in 2021 and it is hard to see any depreciable decline in the housing market anytime soon. Now historically, a declining housing market has preceded most recessions in the US but not with the most recent COVID-induced recession which has a number of researchers indicating that the housing market may actually be aiding in our economic recovery instead of preceding it’s decline.

SO, WHAT ARE YOUR OPTIONS NOW?

As previously indicated, the current housing market presents both a potential risk and opportunity cost depending on how things unfold. If you believe we are currently in a housing bubble and supply will quickly exceed demand, then selling now at a peak might make sense. Conversely, if you believe that demand in your local market will continue to exceed supply in the months and years to come, then selling AND buying now still might make sense. In the end, nobody has a crystal ball so like any other financial predictions you must make in your life, you must come up with your own outlook. And as we have seen recently from the great migration of new buyers from other states like California, Washington, Oregon, New York, New Jersey, and Illinois, their outlook and motivations to move to Arizona is not only a financial consideration alone since most buyers still want to live comfortably in their home and communities as well…and nobody is getting any younger!

HOW WE CAN HELP YOU…

The Goldman Ruge Luxury Group provides luxury property owners, buyers, and sellers in Arizona with the highest level of service and support when dealing with one of the largest personal financial decisions our clients will make in Arizona. Our clients depend on us as their trusted advisors for all aspects associated with their luxury properties both including and beyond the home buying and selling processes by helping them protect and maximizing the asset value of their luxury properties. We primarily focus on luxury property sales in the Paradise Valley, Arcadia, Scottsdale, and Phoenix areas.

LET US HELP YOU…

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