What Defines A Housing Bubble?
I have a series of controversial questions.
When we talk about the housing industry, a standard question always comes up - Are we in a housing bubble? Pundits and economists (me included) are quick to say - Oh no, this is nothing like the last cycle.
"Last cycle" is our definition of a bubble. We look back at the speculative behavior of people assuming prices were always going to rise, which drove demand. On the supply-side, builders and developers were quickly ramping up inventory. At a point, supply outpaced said demand. In this case, speculation + overbuilding = housing bubble.
Question 1: is speculation necessary for a bubble? For the sake of argument, let's assume no.
In Econ 101, we are told equilibrium is when supply = demand.
So question 2: does it follow that a definition of a bubble can simply be put as a mismatch between the economic fundamentals of supply and demand?
If the answer is yes to question 2, question 3: if the problem with today's housing market is too little supply, does that mean we are in a bubble?
I know this is simplistic and goes against everything we believe to be a bubble, but if prices are artificially rising because of the lack of supply, is that telling us something? Some of you may be reading this and asking yourself your own question 4: are we considering the price appreciation today artificial? I think this is up for debate.
Question 5: if we are indeed in a bubble where too little supply is creating prices to rise quicker than if there was adequate inventory, will prices fall dramatically if more supply eventually comes online? And this is where I'd suggest no. We saw when prices corrected at the end of last year and supply marginally increased, the backlog of demand was quick to jump in and push appreciation back up.
In Investopia's definition of a bubble (below), they call for a "massive sell-off" to end the bubble. In our case, this would result in falling prices. So finally, question 6: if prices don't drop dramatically, are we back to square one? Are we in a housing bubble? And I'd still answer - Oh no, this is nothing like the last cycle.
Investopia defines a bubble as an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive sell-off occurs, causing the bubble to deflate.
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4yWe are not seeing enough spec building to keep up with current demand especially here in Arizona. This is definitely NOT like the “last time” in particular because the lending environment is so dramatically different and more difficult than in 2005-2008
Senior Vice President, Senior Architect Leader at Bank of America
4ySo two comments that were not addressed in the article. 1) Location, Location, Location... There is plenty of available housing. However, that supply is not necessarily where the jobs are located that would support the leveraged purchase of a home. 2) The financial conditions of the banks making the loans today is vastly superior to to the condition during the Financial Crisis, which arguably dried up credit availability which made leveraged purchases of housing inaccessible to many therefore homes had to be marked to market, (i.e. price reductions). Secondarily to that was the number of mortgages that became delinquent due to the financial health of the consumer was unprecedented in modern history. In my estimation primarily this was due to two main factors: 1) the quality of the loan origination, (e.g. liar loans), AND 2) the inability for consumers to make their payments after Mr. Greenspan jacked up interest rates to the point where adjustable rate mortgages readjusted to a no-longer affordable payment -- and like a big jenga tower the MBSs all fell apart thus creating the Financial Crisis in 2008. (see the big short) Prices are rising again, in locations with low unemployment, due to two factors. Low availability of supply AND the credit worthiness coupled with exceptionally / historically low interest rates which allows consumers to borrow more than otherwise. So, no bubble -- prices are reasonable given the supply and demand. To be sure affordable housing is available, you just may need to travel to coal country to find it...
Passionate about stimulating curiosity & inspiring scalable innovation(s) within residential construction through a wide range of experiences & global network. Opinions shared are my own & not that of an employer.
4yHere in Atlanta we are coming to the conclusion of a 7+ year real estate run that may never be matched again. After the collapse of 2008, there was so much developed infrastructure left abandoned that wise investors quickly purchased it a highly discounted rates. Not only were their acquisitions cost reduced, the existing roads and utilities made it extremely easy to swoop in and build/sell quickly as the market corrected. Needless to say, that pre-developed inventory is now gone or spoken for, except for a small percentage in what they are now calling the X-burbs (beyond the suburbs). I’m going to argue that we are not moving into a bubble, but rather a realistic stabilization. Rates are still extremely favorable for buyers and demand is still high enough to support a need for more inventory. You can argue that prices are too high, but I’d say over the past 7+ years maybe they were too low due to the highly discounted land acquisitions. Now that pre-existing developments are gone and no developers have absorbed the risk to throw more out there without buyers it will take time to build houses the old school way ... find land, re-zone it, move dirt, put in infrastructure and then take homes vertical as buyers await. Stable awaits!
Finance Director at City of North Plains, Oregon
4yHousing supply in urban areas is largely price inelastic, meaning the supply curve is very steep due to all of the cumulative development and regulatory costs of housing delivery at any price point. With a very steep supply curve in most urban markets, growing demand for both rental and ownership types of housing due to growth will drive prices up at an accelerated rate. A bubble, which really is just artificial pricing based on speculation, is not the problem. What we have is a very real housing delivery cost problem in most markets, and all public interests should be figuring out how to make the supply curve far less steep via lower production costs and less onerous public requirements and process.
Home Builders Marketing, Inc / RLBrownReports
4yInteresting. At the same time, we see no real evidence of a housing bubble in Phoenix. The current and expected level of market activity here is comfortably consistent with the areas population and job growth and not at all comparable to the pre-bubble days of 2004-2005.