Is There A Housing Bubble Ready to Burst? 9 Economists Weigh In
Real estate has exploded recently, with strong cash flow and low interest rates producing record high prices all over the world. The housing market, in particular, has grown so quickly that many have started to worry that another housing crash—similar to one in 2007—is on the horizon. Bisnow asked nine economists to weigh in.
Ray Torto, Harvard Lecturer, Retired Global Chief Economist at CBRE
"I would not characterize the multi-housing market as in a bubble, but rather it is a concentrated market where everybody wants to buy/invest in the same place, driving prices higher, so there is some froth (e.g., NYC, SF, Boston). The consequence is that some will overpay, given their return expectations and time frame. It will not be a bubble bursting, but an overpriced investment…their options then are: work it and wait it out, or sell at a somewhat lower price than purchase price."
Calvin Schnure, SVP of Research & Economic Analysis, NAREIT
"When it comes to the housing market, construction of both new homes and apartments has been so far below normal for the past seven years that we actually have a housing shortage in nearly every part of the country. Vacancy rates are at rock bottom, and inventories of homes for sale—both new and existing—are scarce. Plus there is pent-up demand of millions of Millennials who have not formed households but would do so if they had a job, a more secure full-time job or higher pay. This will only add to demand for living space. Given all this demand and little supply the residential market is FAR from overheated. As for commercial real estate, the recent rapid growth in commercial real estate prices appears to be well supported by improvement in fundamentals. It will be important to follow price trends, credit growth, new supply and economic fundamentals to gauge whether prices begin to get too far out of line in the future."
Rajeev Dhawan, Director of Economic Forecasting Center at J. Mack Robinson College of Business, Georgia State University
"Considering the amount of construction and price increases, it's hard to say if it's overheated. There are regions where the price has increased sharply (say San Francisco/Bay area), but it's really a case of supply and demand. Millennials like to live in high-rises and fancy buildings in urban areas that have all the modern jobs aka tech-related, but I'm not going to say that Charlotte and Nashville should start increasing their construction of this type. To have a bubble, you need to have construction rates higher than the perceived demand, which is what happened in 2003 to 2007. Right now, however, we have the reverse of that. To be honest, I believe that you can only find out it's a bubble after it pops. You can't really predict it with current statistical methods!"
Victor Calanog, Chief Economist, Reis
"There are pockets of high activity amidst low inventory, and these dynamics are pushing prices upwards. But by and large the housing market has yet to show evidence of systematic runaway asset price inflation characterized by home prices rising much faster than household income. The dynamics of commercial real estate tend to be separate, but sometimes related: high household formation and job growth characterized by low real estate inventories are pushing average cap rates in some areas to record lows—but not to worrisome levels just yet, overall."
Robert Bach, Director of Research – Americas, Newmark Grubb Knight Frank
"I don’t think the housing market is overheated based on demand and supply fundamentals.The rate of household formation is picking up after a long hiatus. About 1.7 million new households were formed in the 12 months ending in June, while new units were permitted at an annualized rate of 1.3 million in June, according to the Census Bureau. Permits are going up fast but still seem to be broadly consistent with or even trailing household formation. Rental housing vacancies are at their lowest level since Q4 1985—6.8% currently compared to 9.9% on the eve of the subprime crisis in 2008. Commercial real estate demand and supply fundamentals also don’t look overheated. Rising interest rates will have an impact on both residential and commercial mortgage rates, and therefore, on property values. If rates rise rapidly, that could throw cold water on the markets. But I think the Federal Reserve will take its time as it assesses how quickly to raise rates. A gradual ascent in rates should give the markets time to adjust. Therefore, no bubble at the present time."
Andrew Nelson, US Chief Economist, Colliers International
"I don't think there is a housing bubble. Nationally, we're still below prior peak prices, and the surge in prices that we’re seeing is generally limited to more affluent submarkets. There are still many people who can't get into the market due to bad credit, so sales volumes are still down too. Although the NAR price estimates are 2% above the previous peak, these figures are distorted by disproportionate number of sales in better submarkets. I prefer the Case-Shiller Index, which is based on matched pairs, and this benchmark shows prices are still down at least 10%. Even the hot San Francisco metro overall is just getting back to the previous peak, though there’s clearly some neighborhoods that have blasted through old peak prices. On the other hand, there has been a huge run-up in rents. They're up 20% and are increasing much faster than house prices because Millennials prefer renting and/or don't have the credit for a loan. So while home sales are down, occupied rental space is way up.”
George Ratiu, Director, Quantitative & Commercial Research, National Association of Realtors
“The short answer is no. We look at two things when determining this: credit conditions and population growth. Credit scores are much better than they were in 2007. Average FICO scores are still above 700, while they were closer to 600 in the mid-2000s. And the credit and lending standards are much tighter. Furthermore, the current pace of construction is not matching population growth or the rate of household formation. There was a huge bump in household formation in 2014, with around 2.2 million new households, in comparison to a 570,000 average household formation from 2008 to 2013. And while prices in commercial real estate have passed the 2007 levels, the fundamentals are more important here. There are low vacancies due to strong demand, especially in multifamily properties. The market also presents higher rents and strong cash flows, which have encouraged financing availability from many sources like banks and foreign investors, who are all competing in the comparatively more stable US market. Even the employment growth has improved over the past couple of years. Wages are up 2.1%, adjusted for inflation, which drives up demand for housing. So we do not consider the current market conditions to present a bubble."
Christopher Thornberg, Founding Partner, Beacon Economics
"The housing market is far from overheated. Yes, prices have grown substantially over the last couple years, but this by itself doesn’t tell us anything about the sustainability of the trend. Rather we need to consider the fundamentals. For housing I like to track two metrics—the cost of owning a home relative to incomes and relative to apartment rents. In both cases home prices still look very affordable relative to the long-run trend largely because of low mortgage rates. Indeed, the numbers suggest that as long as mortgage rates stay below 5% there is no reason to believe that the market can’t see another 20% in home price appreciation over the next couple years—just to get back to normal levels of affordability. Will it overshoot then? Maybe—but that is a worry for a couple years from now, not today. "
Mark Dotzour, Chief Economist, Real Estate Center, Texas A&M University
"We are not in a housing bubble. We are in a situation where demand for houses is much higher than supply. With all the job growth and population growth that Texas has experienced, there simply aren’t enough homes available for everyone that would like to buy one. There is about a 3-month inventory of homes for sale in Texas, about half of “normal”. When this happens prices spike. They will continue to increase as long as supply remains so low."