Are We in a Real Estate Housing Bubble?
Nov 30, 2017
Point to nearly any home or commercial property in San Francisco, and you can be just about sure that if it was around 15 years ago, its price has since gone up—substantially. Skyrocketed, even.
Of course, except for recessions and other points of low economic activity, some appreciation is to be expected in any real estate market. In the decade since the subprime mortgage crisis and the following recession, that kind of slow but sure rebound is just what the U.S. real estate market has experienced. The economy is strengthening, interest rates are (cautiously) rising, unemployment rates are low, and house prices are on the rise.
However, many major U.S. markets are experiencing record appreciation in 2017, despite income that isn’t rising at the same breakneck pace and inventory that is 9 percent lower than in 2016. This culmination of factors has led to a growing buzz in real estate, and for commercial real estate investors looking to the future for their commercial mortgages, a singular question.
Are we on the edge of a bubble?
Some experts say yes. After all, the environment in many large markets seems to be in line with that of a real estate bubble. Following the housing crisis, home builders sought after profits by refocusing their attention toward high-end properties and the buyers who could afford them. That’s one reason why robust metropolitan markets such as San Francisco, Los Angeles, and Manhattan, have experienced such a flurry of luxury development in the years since.
Largely, this luxury development has been sustainable because there have been buyers and investors at the ready—but it hasn’t existed in a vacuum, contributing to the sharp rise in market prices. This tension seems to be snapping back for these high-end properties, and it’s all driven by the consumer. While some claim luxury buyers have left the market entirely, that’s only part true. Buyers may just be cooling somewhat on the kinds of prices they’re willing to pay for these properties.
Meanwhile, foreign investors who have funneled money into the busiest luxury markets of the past few years are retreating. China, which was responsible for feeding around $12.5 billion into U.S. properties in 2016, has placed restrictions on foreign investment as its currency continues to depreciate.
With prices high and fewer buyers and investors to sustain this luxury glut, some see this as the natural precursor to a sharp downturn in the market.
Others aren’t so convinced. Even armchair financial commentators know that the industry is fundamentally transformed from what it was over a decade ago. Subprime mortgages targeting unfit borrowers aren’t a factor in the real estate market of today, replaced in part by greater regulatory scrutiny. Anecdotally, housing bubbles are usually characterized by buyers rushing to purchase properties en masse and driving prices skyward, but that doesn’t seem to be the reality of the real estate market in 2017. Yes, certain markets have seen record appreciation—but the lack of demand for luxury housing seems to be a missing part of the equation.
The Reality of the Housing Bubble
So, are we in the middle of a housing bubble or not?
The reality is probably a bit more nuanced than a simple yes or no. Some markets which were hit hardest by the bubble of the aughts, such as Las Vegas, are still struggling to recover. Meanwhile, huge price jumps in popular markets such as San Francisco, Austin, and Seattle reflect the influx of people (and luxury development). There is a huge diversity among markets when it comes to stability, but there isn’t the same severe, systemic overinflation the market experienced leading up to the recession.
U.S. policy priorities may play an impact on the real estate market down the road, though it seems that for now, the economy continues to strengthen. The Fed will remain vigilant to any signs of overvaluation, but it is unlikely to take steps to curb bubbles—instead simply continuing to slowly raise interest rates (which will affect the current interest rate for commercial mortgages) as the economy grows.
If a bubble does burst, it’s unlikely to be a substantial one. It is likely, however, to be isolated within specific markets still struggling to recover than across all markets. In popular markets with a surplus of high-end properties, prices may ease and fall somewhat. Meanwhile, popular markets which continue to draw new residents will take advantage of rising home prices.
The Future of the Real Estate Market
Ultimately, the fear of a bubble encompassing all U.S. real estate markets is probably unwarranted. But the signs within individual markets point to a wide range of possible price moves over the next couple years, both upward and downward.
Perhaps the only certain thing about the housing market in 2017—is uncertainty.
Like this article? Check out our CRE Market Reports page for plenty of commercial real estate market coverage like this and stay in the know all year round.