Are we in a Housing Bubble?

Over the last year and a half, the housing market had all the elements of must-see TV. There’s been plenty of drama and a sympathetic cast of characters as sellers banked plenty of cash and buyers resorted to some creative techniques to seal a deal. We’ve laughed. We’ve cried. We’ve held our breath, waiting to see just how high the prices could go.

And perhaps we’ve turned a rather predictable set of circumstances into a dramatized story—in part because we don’t fully understand what happened more than a decade ago. Whether you’re buying, selling, or staying still, chances are you’re paying attention to the story behind every for-sale sign in your community and what it means for your property value and other investments.

What’s Going on Right Now in the Housing Market?

There’s no doubt we’ve been in a seller’s market for months now. Surging home prices were a very visible part of the pandemic narrative, as people fled cities and their quarantine rules for wide-open suburban spaces. Freed by their new work-from-home status and bolstered by some extra cash in their pockets, they left New York, Chicago, and Los Angeles in record numbers for places like Florida and Arizona—or so it seemed.
This helped fuel home prices in the suburbs, which saw double-digit increases in 2020 and 2021. By the end of August this year, home prices were 41% higher than during 2006’s peak. The National Association of Realtors reported a median sales price of $352,800 in September 2021, an increase of 13.3% from the previous year (2021). Buyers and sellers wondered if the madness would ever end. Sellers debated whether they should put their homes on the market, while buyers worried, they’d never be able to afford a home if they were lucky enough to find a seller to accept their offer. Stories of homes going on the market and immediately receiving multiple over-asking-price offers are common.

Let’s start by taking a closer look at the difference between a boom and a bubble. A housing boom is a period when the price of houses quickly rises. Home values do increase—sometimes rapidly and often over time. Sometimes, the increase is dramatically more than it seems prices ‘should’ rise, but prices rise quickly as buyers compete for inventory. That’s one reason, in these periods where prices rapidly increase, many homeowners view their homes as an investment. It’s fun to see your home value increase and most buyers don’t mind if it happens soon after a purchase.

Wait, Didn’t this happen before?

You may be wondering how the current situation compares with what happened in the mid-2000s because you know the story. The 2000s started with an unprecedented home-building boom as people wanted homes, and builders couldn’t build them fast enough. Then predatory lenders took advantage of uninformed, or unsophisticated borrowers (or in some cases complicated borrowers) and offered outrageous mortgages without verifying the borrower had the money or means to pay back what they borrowed. Then these mortgages were lumped together and sold to hedge funds and banks and ultimately, to consumers.

The system was unsustainable, but few people were listening. When borrowers couldn’t afford to make their mortgage payments and defaulted on their loans, all eyes were on the banks. Some closed. Some businesses folded. Some people lost their homes. The government stepped in to stop banks from collapsing, and we entered the Great Recession of 2008.

It sounds like the plot of a Hollywood film, right? That’s right; it was—with a star-studded cast.

It also sounds a little too familiar for those who lived through the housing crash, especially those who lived in parts of the country where it seemed like the construction would never stop, and the crash was felt the hardest. It’s true that low interest rates in the early to mid-2000s made it easy for people to borrow money. This influx of money made it possible for suburbs in states like Arizona, Florida, and Nevada to explode with a sea of houses that eventually turned into an ocean of foreclosed properties.

The housing market crash was hard for many people, and those who suffered the most are no doubt paying attention to familiar signs. Today we have a strong demand for housing (just like then). Interest rates have been low (just like then). Home prices have surged (just like then). It’s perfectly normal to look at all of these factors and wonder whether we’re in another housing bubble and when that bubble will burst.

What’s the Difference Between a Boom and a Bubble?

Let’s start by taking a closer look at the difference between a boom and a bubble. A housing boom is a period when the price of houses quickly rises. Home values do increase—sometimes rapidly and often over time. Sometimes, the increase is dramatically more than it seems prices ‘should’ rise, but prices rise quickly as buyers compete for inventory. That’s one reason, in these periods where prices rapidly increase, many homeowners view their homes as an investment. It’s fun to see your home value increase and most buyers don’t mind if it happens soon after a purchase.

We saw a rapid rise in home prices in 2020 when the median home sales price increased from $329,000 in the first quarter to $358,700 in the fourth quarter. By the third quarter of 2021, the median price topped $400,000 (Federal Reserve Bank of St. Louis, 2021). Factor in record low interest rates, and it’s easy to see why there’s so much speculation about the current state of the U.S. housing market.

Yet, none of this means we are in a housing bubble, and many of the country’s leading experts don’t think we are (Lee, 2021). Yes, prices rise during a bubble, but the prices tend to be inflated and always on the verge of bursting because they don’t align with the underlying fundamentals—in this case, factors like supply and demand, new construction, and the overall economy.

For example, seeing prices rise when demand is high, and supply is low should not be an immediate cause for concern. When supply increases, they tend to balance either through more homes showing up on the market or new construction in an area. Similarly, when the overall economy is performing well, seeing home prices go up is less of a concern than during times of an economic slowdown.

But it’s still a Bubble, Right?

Highlighting the relationship between the market and the fundamentals helps put the difference between 2021 and the early 2000s in perspective. The current real estate market is being driven—in part—by record-low mortgage rates which encourage people to borrow money. Having money in hand is great as long as you can find a place to spend it.

Unfortunately for buyers, record low inventory meant we had too many buyers searching for too few homes. Workers left urban neighborhoods for the suburbs, but many of those residents already living in the suburbs didn’t seem interested in selling their homes. Perhaps they didn’t like the idea of strangers walking through their homes during a pandemic. Maybe they were content staying in their suddenly popular communities. Whatever their reasons, they kept their homes off the market.

At the same time, developers have not been able to keep up with the demand for new homes in the country. Some estimates report that housing in the U.S. has been underbuilt by more than 5 million units during the last 20 years (Lee, 2021). On top of existing housing shortages, developers are dealing with supply chain disruptions and employment shortages that continue to delay their projects. Specifically, prices for steel, lumber, and drywall reached record levels in 2020. It’s taking longer and costing more to build at the moment. Until developers can complete projects, the housing supply will remain low. And in our view, supply side, along with easy money via low interest rates, will continue to drive prices higher.

Stop Me if you’ve Heard This One

Compare the current situation with what happened in the early and mid-2000s. Yes, demand was high. The success of the booming tech and finance industries put plenty of money in people’s pockets. People from all over the world packed up and moved to be part of the action. Developers worked frantically to keep up with it; municipalities sprang into action to spruce up their cities and attract the throngs of people searching for a higher standard of living.
And best of all, borrowers had access to mortgages with low interest rates.

That’s where lenders step into the picture—and this is a key difference between what happened then and what is happening now. Lenders in the early and mid-2000s were offering larger and riskier loans without taking the time to check the credit history and income of the borrowers (Northeastern University, N.D.). It was possible to qualify for a mortgage without providing proof of income or other assets.

One popular product at the time was the adjustable-rate mortgage, which gave borrowers a low interest rate designed to make payments more affordable. When interest rates climbed, so did the monthly payment—sometimes pushing the payment outside the borrower’s budget. Not only were lenders giving away more money, but borrowers were gladly taking it. Mortgage fraud also increased during this period as some borrowers deliberately misrepresented income and assets.

As long as the money flowed, home prices soared. The overall economy was performing well, but it only takes one shift in the fundamentals to pop a bubble. That happened in 2005 when close to 847,000 foreclosures were filed. There were 1.25 million foreclosures the following year (Northeastern University, n.d.) Between 2006 and 2014, foreclosure took the homes of nearly 10 million Americans (Wolf, 2021). As these homes flooded the market, supply increased, and home prices dropped. By the end of 2008, the U.S. home price index reported its largest decline in history (Northeastern University, n.d.).

What we had during this time was a perfect storm. Developers were throwing up houses in communities where they could find cheap land, but many of these places lacked jobs and infrastructure to sustain an influx of newcomers. Borrowers took mortgages they couldn’t afford to pay back; lenders issued loans without doing due diligence and verifying income and assets. When the defaults started, the banks were stuck with houses they could sell for a fraction of what was owed. Again, a supply side shock.

A cursory look at the differences between 2005 and 2020 should alleviate concerns that we’re currently waiting for another housing bubble to burst- even in the face of rising prices. We may see some similarities on the surface, but the underlying factors look different than they did 15 years ago. A major difference is that while interest rates are low, banks are performing underwriting differently and borrowers are in a better position to afford the debt (this assumes labor is stable- and this is, in our view, the biggest risk to housing, but that’s another discussion). While it is true that prices continue to rise, and no one enjoys paying higher prices, we believe the data shows the underlying economic conditions are different, though we profoundly disagree with the policies which enable these conditions.

Rethinking the 2000s Housing Bubble

Next month, we’ll do a deep dive into real estate fundamentals, how they help us judge property values, and whether the housing market caused the Great Recession of 2008. We’ll also look at the effects of the mid-2000s housing boom and bust in specific regions of the country. The lessons we have learned since then help inform our view of the changing dynamics of the economy and the state of housing in this country. Home ownership creates an enormous amount of wealth in this country. As investors we are focused on how this market can and will impact portfolios.


Lee, N. (September 2, 2021). Here’s why experts believe the U.S. is in a housing boom and not a bubble. CNBC.

Federal Reserve Bank of St. Louis. (October 26, 2021). Median Sales Price of Houses Sold for the United States. FRED Economic Data.

Lee, T. (November 5, 2021). The 2000s housing bubble was greatly exaggerated. Full Stack Economics.

National Association of Realtors. (n.d.). Existing-home sales housing snapshot. National Association of Realtors.

Northeastern University D’Amore-McKim School of Business. (n.d.). What really caused the housing bubble? Northeastern University.

Olick, D. (August 31, 2021). Soaring home prices shattered another record in June, S&P Case-Shiller says. CNBC.

Reuters. (November 17, 2021). U.S. housing starts unexpectedly fall in October; building permits increase. CNBC.

Rosalsky, G. (August 17, 2021). Home prices are now higher than the peak of the 2000s housing bubble. What gives?. NPR Planet Money.

Strozewski, Z. (June 29, 2021). Low inventory, high demand drive U.S. home prices to 15% increase. Newsweek.

Wolf, A. (September 9, 2021). This is not a repeat of the 2008 housing bubble. Fortune.

World Construction Today (n.d.). Construction material shortages to continue in 2021.

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