Tuesday's Market Minute: Housing Bubble 2.0

A true bubble is more than just soaring prices. It also features people behaving in ways that with hindsight will seem totally incomprehensible. Bubbles exist when people are making fortunes doing things that theorists and so-called market experts find difficult to explain. Think about recent Reddit traders who are having a ball chasing a wide variety of stocks while tormenting hedge funds on the other side of those trades.

Housing is one surprise because it was the epicenter of the last bubble, and very seldom does an asset class reinflate so quickly. Driven by historically low-interest rates that make borrowing cheap as well as waves of people fleeing densely populated cities because of COVID-19, home buying has become as competitive as it was during the boom years of the mid-2000s.

Recent housing data shows Existing-Home Sales fell 6.6% in February to a seasonally adjusted annual rate of 6.22 million and housing inventory remained at a record-low of 1.03 million units. Inventory in February was down by 29.5% year-over-year and properties typically sold in 20 days, which also demonstrates record lows. The real kicker is the median Existing-Home Sales price rose to $313,000, 15.8% higher from one year ago, with all regions posting double-digit price gains.

Obviously, sales of existing homes reflect available pandemic scarcity, but available inventory is more a measure of how many people are moving, rather than a true count of actual inventory. While home prices have appreciated more than 60% since November 2012, incomes have only appreciated by 20% and rents by 30% over the same time-period. As in the housing boom of the mid-2000s, home prices are rising faster than personal incomes. Much like the recent bearish development in interest rate sensitive growth stocks, at a certain point, interest rates will rise just enough and there will not be enough buyers with sustainable income to keep paying the higher prices. Either development or both could lead to a pullback in prices.

Photo by Avi Waxman on Unsplash