Is There a Housing Bubble?

A “housing bubble” implies that rapid speculative buying has driven home prices far beyond their actual worth. Because of this, the housing market is due for a “correction.” In layman’s terms, if prices rise too quickly, prices will soon plummet.

Over the past eight years, home prices have increased approximately 50 percent—well outpacing the inflation rate. Is this appreciation justified? Here are opinions from both sides.

Arguments for the existence of a housing bubble

  1. There is a significant disparity between the costs of buying versus renting. When similar discrepancies occurred in the past, a decline in housing prices followed.
  2. We are in the midst of a supply and demand dilemma. While home production has grown significantly since 2003, population and household growth has decreased since the 1970s. Many baby boomers approaching retirement will downsize and sell their homes. This uptick in supply and decrease in demand has already increased the number of vacant homes, and may cause severe price depreciation.
  3. Fundamentals cannot explain the run-up. Experts speculate that homes cannot be worth more than they used to be on account of fundamentals (scarcity of land, rising incomes, population growth, etc.)—because all of these factors existed before the prices began to rise in 1997.
Arguments from the other side
  1. Real estate is an attractive investment option. Real estate can offer investors significant financial and tax advantages. As a result, we see price appreciation.
  2. The rapid price run-up does not necessarily indicate that housing is over-valued. Homes could be worth more because of improvements made by their owners.
  3. The rift between rents and housing prices is justified. The benefits of homeownership, credit availability, and high appreciation rates all help to explain the gap between rents and housing prices.
Those who believe in a real estate bubble anticipate that a crash in home prices may destabilize the entire housing market. Naysayers concede that housing prices may stabilize or decline slightly over the next few years, but certainly will not crash.

As always, consult your financial professional when making investment decisions—especially those based on market-dependent factors—to help protect you and your financial well-being.

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