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Is This A Real Estate Bubble?

The Four Stages Of A Real Estate Cycle

Is This A Real Estate Bubble?

How do you know when the Real Estate Market is either in a shift or getting close to one? Let’s take a look at some of the metrics that would give us the answer to that question:


  1. Average House Payment Jumps by nearly 50% in less than a year. That coupled with rising home prices during the same timeline…The end result is that buyers (even if they wanted to buy) lost 26% of their buying power over the same period…Strike one
  2. In August 54,416 homes were sold in the six counties that make up the Southern California Market. That is the lowest number of home sales in 35 years. Even lower than the number of homes sold during the bubble years of 2007-08 when the world seemed to end and no one could sell their home… Strike Two
  3. Interest rates continue to rise…Need I say more? For every percentage point that rates rise, buyers lose on average 12% of their buying power. This past week (9/18/-9/25/22) buyers lost another 9% as the Fed raised rates once again by six-tenths of a percent. Strike Three!!!


So does all of this add up to a bubble rivaling 2006? The short answer is no. There is a big difference in the two markets. One which will make this shift in market different from those which we have seen in the past. And that is that in 2006-07 somewhere around 90% of the homes were under water. They owed more than they could expect to sell the home for. Today, a like number of homes have substantial inventory. And, those homeowners not only don’t have to sell, but more to the point, it is unlikely that they will do so because if they do, they will lose their existing mortgage rate (probably in the 2-3% range) and be stuck with today’s 6.29% 30-year fixed rate. That scenario is not very attractive to the Baby Boomer generation which is sitting on a substantial portion of today’s potential inventory.


The net result is that we now have even fewer homes on the market then we have experienced during the great run-up in home values which were driven by historically low inventories, and interest rates.


So, what can we expect for the immediate future? My guess is that it is inevitable that prices will adjust (collapse). Sellers will need to be more flexible in the terms of sale, and possibly consider the seller financing option in order to make some transactions possible.


In short, the market will find its equilibrium and slowly begin to chug forward. But, not until we start to feel the inevitability of a new normal.

Until then, there will be homes sold and bought, as there are in every market. For the short term, that may be the exception and not the rule.


Be patient, this too shall pass.




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