Is the Housing Market in a Bubble

Is the Housing Market in a Bubble?

Homebuyers from coast-to-coast are feeling the heat from the housing market. Every major region in the U.S. is experiencing strong appreciation in home prices. Nationally, per the S&P Case-Shiller Index, prices are up 12% over the last year, which is the biggest gain since February 2006.1 This trend has some people wondering if the housing market is at risk of overheating as it did back then.

To evaluate if the current housing boom is sustainable, we need to consider the contributing factors. First, as the pandemic increased the number of people working from home and attending school virtually, housing demand has surged as existing homeowners seek larger dwellings and urban professionals move to areas where homeownership is more common. Simultaneously, to help support the economy in the wake of the pandemic, the Federal Reserve has kept monetary policy extremely loose, which resulted in lower interest rates and more affordable homes since interest accounts for a significant portion of mortgage payments. Demographics have also contributed to housing demand as Millennials, the largest generation in the U.S., are in their prime buying years.

Meanwhile, housing supply is extremely limited. Currently, the number of existing homes for sale is near record lows and properties are being sold faster than ever.2 Several factors have contributed to the housing shortage. Since the last housing bust, homebuilders have remained cautious, resulting in years of underinvestment. Another longstanding issue is local zoning regulations, which are a common inhibitor to new home construction. More recently, the pandemic has caused labor and supply shortages, which have slowed home building.

Together, the lack of housing inventory and surging demand have fueled rising home prices. However, we don’t believe the housing market is in a bubble like it was 15 years ago. Unlike in the 2000s, lenders have maintained strict underwriting standards, as evidenced by homebuyers’ record-high average credit scores.3 Even though current home prices far exceed their peak in 2007, today’s valuations are not extreme. The Housing Affordability Index reports that the median home is reasonably affordable as low interest rates and federal stimulus payments have offset surging home prices.4

While we don’t believe the housing market is due for a correction, home prices are unlikely to continue surging this rapidly. As the pandemic wanes and the economy reopens, many of the factors contributing to the housing imbalance will abate. For example, the need for more space will ease and deurbanization will likely slow. At the same time, stimulus will likely fade and interest rates could move higher, further limiting demand. Labor and supply shortages should subside as well. However, it’s unlikely that homebuilders can keep pace with demand anytime soon due to the dearth of homes for sale, favorable demographics, job growth, and easing lending standards.

Likely, the biggest risk to the market will be persistently higher growth and inflation, which could cause mortgage rates to increase and pressure home prices. Currently, we expect a temporary jump in growth and inflation due to recent stimulus payments and COVID-related labor shortages and supply chain bottlenecks. There’s a risk that inflation could continue to increase, causing a surge in interest rates. However, we believe it’s more likely that the aging population, technology advances, and high debt levels will dampen growth and inflation over the intermediate term. Thus, we believe this small but important sector of the economy is likely to remain strong.

If you need assistance and would like to talk to a Blue Trust advisor, please contact us at 800.987.2987 or email

1 FactSet
4 FactSet

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