So if we’re not in a housing bubble

Everywhere I look, there’s an article about home prices soaring to record highs, a tweet about someone getting outbid on a home they offered 10% above ask on, or a video trying to make sense of the market right now and if one should get involved. Anecdotes have prevailed in these uncertain times. It’s a bubble! Home prices have increased 25% in our market and it’s going to pop like 2008. We’ve all heard, or uttered, these words in the last several months.

There are talks of bubbles and crashes. There’s confusion. Dismay about whether younger folks will ever be able to afford a home. What’s going on?!

First, the housing market isn’t broken. It’s operating exactly in the way one would expect based on how it’s been structured. The system may be fundamentally broken, but the market is not. This gives me some level of confidence in saying that as of April 2021, I don’t believe that we’re in a housing bubble. Technical indicators don’t point to one either. Here’s to this paragraph aging like sour milk if we’re in one, or going unnoticed if we’re not.

So if we’re not in a housing bubble, what exactly is happening? There are three prevailing themes, as I see them, that explain the state of the market.

Let’s break them down.

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(1) Macroeconomic view
Two factors are driving the housing market right now from a macroeconomic perspective: low interest rates and higher net worths (via savings & equities). Unprecedented liquidity from the federal government is also helping, but not to the extent that it can be pointed to as a key driver for the buyers of homes, as the stimulus packages have been targeted towards basic infrastructure and assistance programs for lower income groups.

At the beginning of the pandemic, the Fed cut interest rates to help stimulate the economy and stabilize it from the system shock of the virus. It has maintained this stance in the year since, and projects to keep rates low until 2023. In introducing and standing by this aggressive policy, mortgage rates have been driven down to record lows, continuing a 30-year trend down from the record high rate of 18.61% in 1981.

30 year fixed mortgage rates. Source: Freddy Mac & St. Louis Fed

Mortgage rates bottomed out at around 2.65% in the beginning of January, and have rebounded slightly to 3.04% by April 15th. These are the lowest rates ever. What this means in real terms is that it’s almost free to borrow money for a home. For people who might have bought their first house in the early 80’s, they’re entering into retirement with an opportunity to lock in a fixed rate 80% lower than what they got on their first homes. This can mean potentially hundreds of thousands of dollars saved in interest payments over the life of a mortgage. There may never be another time as good as this past year to lock in a low rate.

But low interest rates alone aren’t enough to incentivize people to take out mortgages. They also need more principal money as a down payment and reserve for future payments. Enter savings and increased stock portfolios. Personal savings rates have spiked in the last year, ranging from 13–20% outside of the first months of lockdown. This has been double, and in some cases triple, the 7–8% saved since around 2011. What’s more, the S&P 500 increased by 18.4% in 2020, and is up another 11% so far in 2021. With more money being saved, and investments yielding higher returns, the more there is to spend on homes.

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(2) Improvements, Space & Peer Pressure — The Social Perspective
If this last year taught us anything about our homes, it’s that we looked to them in collective dissatisfaction. When we weren’t spending 100% of our time at home, the tattered rug, peeling paint or faulty AC didn’t bother us as much. After a long day at the office, we were (mostly) happy plopping down on a couch who’s springs had long since broken, to stare at our good screens. But in working remotely, that tattered carpet looked dreadful as we peered over our bad screens, and the AC system’s malfunctions were unbearable in the summer months. With every member of the family camping out in different sections of the house or apartment, plotting offensive campaigns for the best places to work and lounge, the endless war for space needed to be rectified by treaty.

Could a new home solve the issues we’d all long since put off, and offer the family a fresh start — specifically one with more space? We took to the internet to find out. Now Instagram, now Youtube! Now TikTok and Zillow! We turned our eyes with envy to see what gifts of housing others were receiving. We ogled at property in ways we never have before. Zillow saw 9.6 billion searches in 2020, an increase of 20% over 2019. Yes, maybe a new home could solve these issues that have been heightened by the pandemic.

Home sales skyrocketed in 2020 to levels not seen since before the Great Recession. Indeed, since the beginning of last summer, there have been more home sales than in any other time period except for 2005–2008 since 1970. Not only does this makes sense because of the increased desire for more space and improved housing, but it also tracks with how Americans view investing. While having more cash on hand from savings and proceeds from the growth of public equities is all well and good, a whopping 90% of Americans prefer their primary residence as an investment over the stock market. People are likely to move funds from savings and the stock market into their homes, as they believe this to be the best strategy.

Millennials, that oft-derided demographic group who came of age in the wake of the Great Recession, have driven much of the demand for housing in this low rate, higher savings environment, as they were the group most impacted by the 2008 financial calamity. Sensing this may be their best chance at home ownership, they’ve poured into the market, adding millions to a demand curve that was already quite robust.