Economics Suggest A Less Severe Housing Bubble

It is no secret that the housing market today is overvalued, due to an issue of supply and demand; however, it is not a typical bubble. Construction costs have risen, rents around the United States have increased, and the cost of buying a home has become unaffordable for most. If the cost of home ownership continues to rise and outrun construction costs, it creates an incentive for builders to build more homes. Renting these homes for developers and investors is proving to be the way to go given that the quick increase in home values is forcing many people to rent instead of buy.

In contrast with the previous housing bubble experienced in the mid-2000’s, today’s investors are seeking more long-term opportunities. Meaning they purchase a home, fix it up, and rather than turning it over for a quick sale, they are renting it to families who are currently being priced out of owning their own home. While quick fix and flips have picked up in recent months, these types of investments are not making up the majority in the current market, therefore it is unlikely that we will see any bubbles burst in the near future. This is not to say that the bubble is not being inflated by things such as investors looking for a quick sell for profit and a substantial increase in mortgage debt. Just over the past year, more investors have financed their projects with debt, marking the most growth since during the housing bubble we last encountered. The present NAHB/Wells Fargo housing market index shows that single family sales have dropped over the last 4 months and are forecasted to decrease over the next 6 months.

The factors that are capable of inflating the bubble still make up a large portion of the market, therefore it would be precocious to say that the housing market will cool off gracefully.