Why America’s Housing Boom Isn’t a Bubble – BRINK – Conversations and Insights on Global Business

In philadelphia cream, the median house price has increased by 48% over the past decade. In Atlanta, the median selling price of a metro home hit an all-time high in June of $372,500. Don’t be left behind by big cities, WoodedIdaho, recently ranked as the most overvalued market in the nation, where homes are selling nearly 81% more than they should.

As the hot real estate market finally shows signs of coolingits meteoric rise has many Americans wondering if house prices are a bubble about to burst, much like the meltdown that triggered the Great Recession.

Professor of real estate and finance at Wharton Benjamin Keys says that is not the case.

“I am very strongly against this point of view. I don’t think it’s likely that we’ll see a bubble burst like we saw in 2008, 2009 and 2010,” he said in an interview with Wharton Business Daily on SiriusXM.

Although frantic buying and inflated prices are reminiscent of the pre-recession period, Keys said there are several factors that make today’s market different. First, the lending standards that were relaxed during the bubble are now much stricter, with strict requirements for good credit, full documentation and a large down payment. In contrast, the pre-recession years were marked by subprime mortgages, skyrocketing low interest rates, low underwriting, negative amortization construction, and other questionable practices.

Second, the boom of the early 2000s was also fueled by a surge in home building which led to abundant supply. But there has been a building shortage over the past 10 years, especially in high-demand cities. The result is a mismatch between supply and demand that cannot be resolved quickly or easily.

“I think there’s been a bit of a hangover from that boom and bust of 2000, and we’re underbuilt in a lot of cities where there’s a demand for jobs, where there’s there’s a demand for housing,” Keys said.

Bigger homes, higher prices and fierce competition have broken the rungs of the traditional home buying ladder.

Keys cited many barriers to new construction, including high labor and material costs. Many cities have zoning restrictions, minimum lot sizes, time-consuming approval processes, and other covenants that make it difficult to build densely or affordably. Homebuilding is expensive, Keys said, and it’s becoming increasingly difficult for developers to make a profit on modest homes.

“With housing, unlike almost any other commodity, when prices go up, we just don’t see building reacting the same way,” he said, adding that construction is expected to resume in the coming months. come, especially in places where it’s easier to build.

Developers also need to hedge their bets in uncertain times. The COVID-19 pandemic has boosted buying unexpectedly, and it’s unclear whether this strong demand will continue after the pandemic subsides.

“I think some of the uncertainty around working from home and some of the uncertainty around the strength of the economy in general is going to contribute to the reluctance of homebuilders to invest heavily,” Keys said.

The story of two home buyers

Recent housing demand has been driven by two distinct groups: baby boomers and millennials. Baby boomers “own a lot of the nation’s wealth,” Keys said, and they’re using that money to retire early, buy second or vacation homes, and even upgrade to bigger homes rather than living. reduce their workforce. Millennials are now at the peak of their home buying years, and those with good incomes are entering the market with enthusiasm.

“I think the demographics should have a strong housing market over the next few years barring a big macro disruption,” Keys said.

None of this bodes well for potential buyers who don’t have a lot of cash. Bigger homes, higher prices, and fierce competition have shattered the rungs of the traditional homebuying ladder, where people start small and trade in for more square footage and amenities. Economists call it “filtering,” and the pace of it has slowed dramatically, Keys explained.

“If you think about the affordability challenges, it’s obvious,” he said. “If the new construction coming in is at the top of the distribution, then how are low-income families going to enter the housing market with a first home?”

The situation has spawned a new player in the real estate space: single-family rental companies. These companies are seizing the moment by buying properties in desirable neighborhoods and renting them out to families who cannot afford to buy in those neighborhoods. Keys said this is a small but growing trend that is becoming important in some markets.

Rents have risen sharply in recent years, outpacing inflation over the past decade. Keys expects this increase to continue, especially in cities with high housing demand.

“I think all of these things point to challenges for the average buyer trying to get their foot in the door of home ownership,” he said.

What to watch

Although not a bubble, the real estate market is not immune to disruptions. Keys said he was watching interest rates, which are still hovering around 3% for a 30-year fixed rate mortgage. These low rates encourage buyers because it means they can afford the monthly payments despite the high priced market. If there is a spike in rates due to a change in fiscal or monetary policy, that would have a chilling effect on buyers, he noted.

Another potential disruptor is jobs and the broader economy, he said. Homebuyers still need stable jobs and down payments to enter or stay in the real estate game.

Keys also hasn’t ignored other forces, such as foreign buyers who have largely left the real estate market during the pandemic and are likely to return, driving up prices in places like New York, Miami and Los Angeles.

“There are also upward pressures, so it’s not just a story of what goes up, has to come down for the housing market right now,” he said.

A version of this article originally appeared on the [email protected] blog.

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