What is going on in the housing market? Are rising mortgage rates causing home prices to decline?
The media has been suggesting a bubble and a decline in home pricing. Google searches containing the term “housing bubble” just spiked as well. Let’s dig in and see what is actually going on.
In a “bubble” environment, like we saw in the past, there is a large amount of supply and a lack of demand. For example, in 2006, there were roughly 3.7 million homes for sale and not enough demand to consume the supply. In 2006, there were also many other dynamics such as looser lending laws and individuals getting qualified with just a pulse, so to speak.
When looking at the current environment, we have the tightest housing inventory on record, with less than 1 million homes for sale and some of the strongest demand ever seen. And the demand is increasing every year due to demographics. Within the latest Existing Home Sales report, we saw that homes listed on the market dropped from 19 days to 18 days. When we compare 2006 versus current times, currently there are 12 million more households (demand) and 2.5 million fewer homes (supply).
Also, in 2006 interest rates ran about 2% higher than interest rates that are available today and currently average hourly earnings have increased by around 60% from 2006 to today as per the Bureau of Labor Statistics.
Lastly, today’s home appreciation is due to record low inventory and historic buyer demand which wasn’t the case in 2006. The Case Shiller which is considered the “gold standard” of home appreciation reports was just released showing that homes appreciated by 19.2% from January 2021 to January 2022.
So no, we are not seeing a housing bubble as certain outlets are announcing. We are seeing record levels of demand and record low levels of housing supply. This current dynamic is very supportive of home pricing and doesn’t seem to be weakening as of yet.