by John Sandy
The housing bubble in the United States appears to reach new levels every month. In some markets, homes are up as much as 500% from prices last seen in 1991.
Wages of workers, meanwhile, have increased at a bit above the rate of inflation. For example, a typical worker earning $21,500 in 1991 received about $55,000 in 2020. That’s slightly more than a 250% increase. This data shows a huge disconnect between the increase in housing costs and wages that workers receive.
People ask, what is causing the housing bubble? First and foremost, exceedingly low mortgage rates make it easier for buyers to qualify for homes, even as home prices increase. Historically, mortgage rates were at about 8%. But in recent years some buyers could snag a mortgage for 3.25%. Another factor is the rising cost of building lots and construction materials. With higher labor costs to build a home, the housing prices spiral even higher.
The lack of availability of houses for sale adds another layer of complexity driving prices higher. In some communities with a population of 100,000, resales on the market number 125 or fewer homes at this time. In one such community, only 26 houses were on the market in November 2021. And some homes currently for sale are less desirable due to location or condition.
With inflation reaching a 10-year high in 2021, there’s little chance for housing costs to stabilize anytime soon, unless the government acts forcefully to blunt inflation by increasing interest rates. This would slow demand for new mortgages and possibly, at the same time, create a pause in the bubble or stop it altogether.
A bust in the stock market or a major recession would have a significant impact on prices, as well. Should an economic downturn come, home prices will likely go down and recent buyers may find themselves under water, meaning an owner has a mortgage balance that’s higher than a home’s market value. If more than a few homeowners find themselves under water, a drop in home prices would accelerate.
The housing bubble has major consequences for young families. A new college graduate earing $50,000 in 2021 qualifies for a mortgage of two and one-half times income or about $125,000. In most markets in the United States, even basic starter homes go for over $250,000. Under these circumstances, young people are priced out of the housing market.
In the best of times, home prices are a complicated matter. And no two markets behave in the same way. Suffice to say, there are few winners when the housing market is unstable, such as is the case today. In the current market, buyers should be extremely careful to not end up in financial trouble down the road.