Boston Condos for Sale

What Is a Housing Bubble?

It all starts when demand for housing increases and supply starts to dwindle, a dynamic that can only lead to rising prices. As inventories fall, desperate buyers start spending even more money on houses that by this point are selling well above market value. That’s blood in the water for speculators, who then flood the market with more money as they try to cash in on the trend. Eventually, buyers give up, demand craters and prices plummet back to Earth — that’s when the bubble bursts.

What remains is a landscape of people trapped in houses that are now worth far less than the amount of money they borrowed to pay for them, their equity negative, their mortgages underwater.

How Hot Is the Housing Market Right Now?

At the end of May, Redfin reported that more than half of America’s homes were selling above list price, up from 1 in 4 just one year earlier. That’s the mark of an incredibly hot real estate market — one where the seller has all the leverage.

A combination of factors has steered the trend.

The pandemic caused policymakers to slash interest rates to historic lows, incentivizing buyers to pounce on loans that would almost certainly never be so cheap again. At the same time, renters flooded out of the congested and vulnerable cities to buy homes in the suburbs. While that was happening, millions of former office workers became telecommuters who could now work from anywhere and move wherever they wanted. Then a lumber shortage sent the price of new home construction skyward.

Fast-forward to mid-summer and the housing market is the hottest it’s been in 20 years, breaking record after record, including:

• Record high median sale prices
• Record high sales above list
• Record high average sale-to-list price ratio
• Record low days on the market

So, Is This a Housing Bubble?

Since 2008, the term “housing bubble” has become a common phrase, but it’s a difficult thing to nail down. Experts don’t even agree on how to define the term “bubble” in the first place or what criteria the market has to meet in order to be in one.

The main reason that bubbles are hard to identify is that the most important component of a bubble — speculative sentiment — can’t be quantified.

In the runup to 2008, there were stories of people taking out home equity loans to buy things like jet skis and hot tubs. Home values were rising so quickly that their owners believed the lost equity would soon replace itself as the property continued to appreciate — home values, after all, could only continue to rise.

That’s called speculative sentiment, and it’s a key ingredient of any bubble. Fundamental forces like supply and demand determine price and value in a healthy market. When intangibles like speculative sentiment start driving prices, it’s a good clue that a bubble is forming.

Boston Real Estate and the Bottom Line

While it’s true that housing prices are still soaring, it appears that low supply and high demand — not speculative sentiment — are what’s setting fire to the market. According to the Motley Fool, most experts do not believe the United States is currently in a housing bubble.

Boston Housing Buuble FAQ

What is a housing bubble?