Monthly Myth: We're in a Housing Bubble...and it's Going to Crash

The housing market is red hot. Across the country, demand is increasing while inventory, for a variety of reasons, remains stagnant. There are hundreds of thousands, possibly millions, of Americans looking for a home, and they are all competing for a limited supply of available properties.

Prices are soaring, and they appear to be growing by leaps and bounds every month. We started the year with high expectations for home-price increases, and we may just surpass these expectations.

All of this has led to the theory that we are in a bubble. This theory, in turn, has led to the fear that the bubble will burst, as all eventually do.

Is this an unfounded myth, or are we really in a housing bubble? When we examine the nature of housing bubbles and the current market’ we’ll see that this myth is largely false; we’re not in a bubble, but in a strong market driven by real demand.


The Myth: We’re in a Housing Bubble…and it’s Going to CRASH!


What is a Housing Bubble Anyhow?

Before we can determine whether or not we’re really in a housing bubble, we need to understand what a “bubble” is. From an economic perspective, a market bubble occurs when the prices of a certain product or service outpace their actual value. The price, by one way or another, has been artificially inflated beyond what it’s really worth. Think of it this way, in a “bubble,” the inflated value is hollow; it’s empty.

Eventually, consumers realize that the price is too high and not worth the cost. Almost immediately, they stop buying, which causes the bubble to burst.

A good example of a bubble is the “dot-com boom” of the late 1990’s. During this period, the hype surrounding internet and technology companies was so high that U.S. tech stock rose to massive levels. With little experience, a technology professional with a half-formed idea could generate millions from investors. Around 2001, however, people realized that a website or tech idea, in and of itself, was not a guaranteed money maker. Investors started to pull back, and the bubble burst, causing numerous internet companies, investors, and stock owners to go broke.


The Current Housing Rises

Housing prices are growing steadily; in some places rapidly. In the United States, the price of a typical home has grown by over 13% according to Zillow, one of the top real-estate-information websites. They don’t just relay information, they also make predictions, and they forecast that home prices over the next year will grow by nearly 15%.

In some places, the changes can be higher or lower. Austin, Texas, a city known for rapid growth, as seen prices rise almost 30% in a single year. Other cities have seen lighter growth; Boston, for example, has only grown by 4.8%, while Chicago has grown by 9.4%.

With such rapid rises across the country, and even steeper rises in various markets, it’s easy to assume that we are in a bubble. But when you take a closer look, you see that the current situation is not a hollow bubble, but stable market build on real demand.


Fact: It (Probably) Won’t, Because We’re NOT in a Bubble

Anything is possible in the future, and you can likely find highly-educated, brilliantly-minded economists (who are certainly smarter than us!) who claim we are in a bubble; a bubble that is sure to crash. But a bubble is hollow, inflated by artificial demand, hype, irresponsible government policy, or irregular market practices.

The reason the current market is so hot is not (at least, so it seems) because of artificial influences. People are not clamoring for houses because of massive hype (such as the dot-com boom), and housing is not in higher-than-normal demand because of loose and irresponsible lending and borrowing practices, which is largely seen as triggering the 2008 crisis.

No, this situation is different. Buyers are driving up the price of homes because they genuinely want or need a house. It’s believed the housing is partially driven by COVID-19. When the virus took a foothold in the United States, millions of people were forced into lockdown, having to stay home and shelter in place to reduce the spread of this unyielding virus. Because of stay-at-home orders, and the realization that it could happen again, many people decided to flee their crammed apartment buildings for the space and comfort of a single-family property.

With work-from-home a new reality for numerous professionals, the need to live close to work was reduced or entirely eliminated. They could finally move to a more spacious, and more distant, property. These factors, and more, have caused a rise in demand for housing.

The current rise in demand, and the subsequent rise in home prices, are creating real, tangible increases in the value of homes. For this reason, it seems safe to say that the current market is not a hollow bubble. A “burst,” therefore, is not inevitable.


Bridge Loans Can Help

If you are currently buying a new home, but haven’t sold your house yet, a bridge loan can help. As competion for housing rises, bridge loans are an important tool for eliminating the need for offers that are contingent on selling your own house. This can make your offer far more attractive, and in many markets it may be required to keep pace with other buyers.

If you are on a strict moving deadline, you should consider using a bridge loan, especially in the current market. To use this option, you’ll need to meet a few requirements, including a letter that documents your intention to sell the house. You will also need 20% equity in your current residence and 12 months of financial reserves. Like all loans, you’ll also need to meet qualifying credit scores and debt ratios.


Get the High-Quality Loan You Deserve

You deserve a wonderful home with an affordable mortgage payment. Contact our team today and let us help you get the right loan for your specific needs. From purchase loans for first-time buyers to bridge loans when you can’t qualify for two housing payments, we are here to help make your homeownership more affordable and less stressful!