The phrase "real estate bubble" can instill fear in anyone who weathered the last housing crisis. While the term is often thrown around in headlines, defining a true real estate bubble can be complicated.
A bubble is often a phenomenon best observed in the rearview mirror. As it is going on, it just looks like a great housing market. A bubble could be considered a bit like musical chairs: It’s fine as long as the music keeps playing; it’s when it stops that the trouble begins.
The Pandemic Almost-Bubble In Boise
A bubble is a market condition in which real estate prices rise rapidly and unsustainably, followed by a sharp decline. Determining why prices rise is part of determining if a market is in a bubble. Many people were concerned that the pandemic buying frenzy was a bubble, but it was largely a case of supply and demand. People were eager to move away from cities.
A pandemic-driven near-bubble occurred in Boise, ID. In March 2020, the median housing price was $351,000, according to Redfin data. By May 2022, it had peaked at $581,000. Luckily, what happened in Boise was less of a bubble and more of a slow deflation. After the price peak, sales declined by 46.5% in November 2022. Things have somewhat righted themselves since then. Sales aren’t up to their pre-pandemic levels, but they are rebounding. As of August 2024, the median price was $490,000. While the episode strained housing affordability in Boise, it did not lead to a crash.
Is Florida In A Housing Bubble?
There have been concerns that Florida is one market where multiple housing bubbles are imminent. Global investment firm UBS released a report stating that Miami, FL has the highest risk for a global housing bubble. The report cited rapidly rising prices driven by the soaring luxury market.
Reventure CEO Nick Gerli has been outspoken about the potential for a Florida housing bubble. He believes it may already be happening. He posted a video touring homes in Punta Gorda, FL, showing how Zestimates have plummeted. Realtor.com reported that Tampa, FL, where inventory has soared, also leads the country in price reductions. According to Redfin data, home sales in that area are down about 21% year over year. Tampa may have two earmarks of a bubble: high prices and a rapid increase in inventory.
What Would It Take For A Housing Bubble To Form In 2025?
The expectation for 2025 is that lower mortgage rates will increase buyer demand. That could take care of the inventory that has risen in some markets. However, if cheaper mortgage rates don’t bring buyers at the level anticipated, inventory rises and prices fall, that could mean that a real estate bubble could pop in some markets. This will likely be an isolated situation, possibly within some of the Florida markets mentioned above.
One difference from the Great Financial Crisis is that most homeowners have significant equity. The lending practices that led to the subprime crisis have mostly been eliminated. The rate of foreclosure is well below historical levels. Most homeowners are in a better financial position than they were in 2008-2011 when foreclosure rates were skyrocketing.
Bubbles tend to be characterized by irrational behavior where speculators and investors get overextended, lured in by cheap financing and the prospect of easy profits. That doesn’t describe the current market, which has seen slower housing sales over the past year. Although prices are very elevated, that isn’t enough to determine if we are experiencing a bubble. The pace of home price growth is also slowing, a sign that if there is a bubble, it may not pop but slowly deflate.
Home prices tend to go up over time, but the progression is not usually linear; there are often little dips along the way. The Great Financial Crisis was a bit of an anomaly because the peak and valley were so short and sharp. A slumping economy is another important component of a housing bubble.
In recent years, recession chatter has competed with housing bubble talk for gloomy headlines. However, it seems that the economy is steadying. Inflation has cooled and the job market remains on solid footing. Most economic indicators are performing well despite the turmoil of a presidential election cycle. The inventory of homes for sale is higher than it has been, but it is still not in dangerous territory and now sits around where it was before the pandemic began. So far, potential home sellers have been reluctant to list their houses, partly because they have low mortgage rates and equity levels. That should prevent a widespread rush of homes to market from occurring.
There are no guarantees in the real estate market, but a nationwide bubble in 2025 seems highly unlikely. However, pockets of inflated prices and rising inventory may open some areas of opportunity for savvy real estate investors and homebuyers. Even the markets most impacted by the last housing bubble eventually rebounded, although not without significant pain for many homeowners.