Given how hot the housing market has been, you may have heard talk of a housing bubble in the media. Let’s break this down and analyze what causes a housing bubble.
In typical bubble-like conditions, as we saw during the last housing bubble, there is a decline in demand and a large amount of supply. Back in 2007, there were roughly 3.7 million homes for sale and not enough demand to sop up that supply.
If we fast forward to today, we have some of the tightest inventory ever, with only 1.2 million homes for sale. Additionally, demand is extremely strong and increasing due to demographics. When we look at supply and demand now compared to 2007, there are 12 million more households (demand) and 2.5 million fewer homes.
In fact, because there is so much demand and such a backlog, the country’s largest homebuilder, D.R. Horton, is pulling back on order activity to allow housing’s strained supply chain an opportunity to catch up with demand. In other words, there is so much demand that they have to purposely slow down building, as they don’t have enough supply of materials, labor, and appliances.
While the pace of appreciation has been hot, and this may slow in the coming months, there is a big difference between slower home price growth and declines in prices. Plus, even though buying a home can be challenging right now, renting comes with its own challenges, including rising rental prices across the country. That’s why it’s so important to understand the current market dynamics when it comes to talking housing bubble.
Reference: Information provided by MBS Highway