Five reasons we are not in a real estate bubble. But is now the time to buy a house?

Housing prices nationally as of Oct 31, 2021 were up over 19%. That’s the highest one-year gain in history and though rates varied by location, it was not just in a few places. This is obviously unsustainable, but are we in a bubble like 2008? It’s easy to think we are if you talk to new home buyers. 

Let’s look at a few alternative perspectives. 

Relative US housing value is still excellent: Yes, in 2022, housing prices are up almost 250% since 1989, when mortgage rates were over 10%. But the cost to finance that same house is so much cheaper because rates are lower. Adjust it for rates and inflation and the monthly mortgage payments are actually 30% lower than they were in 1989! As a percentage of income, the average monthly mortgage payment in 2022 is 21%, below the 80s and 90s  when it was 28%.  

Housing quality is better than in the past: The quality of the average house is so much better than it was in the past. Compared to the 1970’s the average home is nearly double in size with more bathrooms, amenities and with fewer people per household. In economic terms, the utility is higher, something we often forget when we talk about inflation and prices.    

US Housing is cheap by comparison: The rest of the developed world is no better, and in some cases worse off. Check out this graph based on Dallas Federal Reserve data up to 2021. If it’s a bubble, it’s not just the US market.   

Demographic Demand: There is a great deal of housing demand from millennials who are the largest share of US population.  As a group they are later to get married and buy housing. For instance, at age 30, only 42% of Millennials owned homes vs. 48% for Generation X, and 51% for Baby Boomers. The Covid-19 pandemic was clearly a catalyst, but the demographics say this was going to happen anyway. And it’s just begun, the largest five-year population of Millennials (indeed of any group in the US) were 27-32 as of 2022.      

Inadequate building supply: Much has been made of the supply and labor constraints of the pandemic, but in truth, the seeds of a supply issue with housing have been in the making since the 2008 crisis when a lot of investors got stuck with houses they couldn’t move. Even before the pandemic, we were not on a pace to meet the long term demand of ~1.2 Million housing starts a year. (We added closer to 1.5M per year from 1965 to 2008). Zoning issues are probably making this worse. 

Should you buy a house right now? I don’t think the decision is any different than it was for the past several decades. A home is most importantly a lifestyle choice, and secondly an investment. It’s going to be hard to find the right home, especially at the lower end in desirable places and that’s a big headache.  But I don’t think general real estate evaluations are a reason not to buy if you are ready.