Home Prices Increase 17.2%—Is the Housing Market in a Bubble?

The median price for an existing home reached $329,100, a 17.2% year-over-year increase, causing some fear of an unsustainable bubble, but Bloomberg says not to fear. Bubbles are driven by irrational behaviors driving up prices, yet the housing market’s price acceleration can be pinpointed to low inventory. Bloomberg suggests the thriving housing market will remain for quarters, if not years. Housing stock remains at a record low with just 2.1 months of supply, according to the National Association of Realtors, but even so, housing affordability levels remain stable.

Another way to look at this is through the lens of household finances. Household balance sheets are in pristine condition. Debt as a percentage of personal income has dropped to 85.3% from a peak of 117.1% in 2009, according to the Federal Reserve. The ratio of total required mortgage service payments to total disposable income has plummeted to 3.97 from the high of 7.21 in 2007.

Sure, inventory levels can change quickly, as we saw between 2005 and 2007, and no doubt sellers will test the market later this year as the pandemic eases. But there is little reason to worry about the current situation reversing anytime soon to the point where supply overwhelms demand. As Bill McBride, who runs the Calculated Risk blog and called the last housing crash, has noted to readers, demographics are about to become a huge tailwind for housing.

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