Are We in a Real Estate Bubble?
This is Charles Dzama here at CD Financial, with another edition of 3MOT, empowering you with financial ideas. Are we in a real estate bubble? I’ll tell you what one of my team members said here at the firm. She said, “Charles, every home on my street apparently is worth a million dollars now.” Now, albeit, we live in Southern California and South Orange County, and it is coastal on her street. Still, it seems really rich, the prices of things. Why? Let’s talk about that.
Interest rates were really, really low, and they’re supposed to stay there until 2023. I’ve had people say, “Charles, we got a 30-year mortgage for 2.25%.” Can you believe that? To use somebody else’s money for 30 years, well less than 3%, it’s almost unheard of. That’s what they’re talking about when they say money is cheap. You’re using somebody’s money for a long time, really inexpensively.
What else happened? Well, maybe those who are living in an apartment said, “Wait a minute. I’m paying X amount of dollars for my apartment rent. I can move out of the city. I’m already virtually working from home and I’m living at my home. I can move out of the city, buy a place in the suburbs, or even the countryside, and that same amount for rent, if I just add a little bit more, I can pay for the mortgage that’s really inexpensive now with interest rates, and the insurance, and the taxes. All together, I’m fine.” And so that’s what happened too.
When COVID first hit, everybody was frozen. They started working virtually, but at the same time, nobody was buying anything. But when they started buying, the supply was there. They rushed to start buying homes, and the supply went away. And so, there’s a big demand still, but the supply is way down. So it pushes prices up.
What else happened? Have you heard about inflation? What about the cost of construction goods? The cost of goods is one of the things that’s gone up higher than anything else. So if there’s already a home built, it’s worth a lot more now because to build a place with new construction costs so much more.
What has happened suddenly is that mortgages went from 2.5% to 5% seemingly overnight. With just one rate hike from the Federal reserve bank of .25%, interest rates for a mortgage soared. The last rate increase was .5%, and it is keeping the rates high as can be. This most assuredly will put pressure on the real estate home values to decrease and go down.
So, are we in a real estate bubble? Probably not a bubble, no, because flippers weren’t there buying and selling, buying and selling. That’s not what caused this. But are prices inflated right now a little bit? Probably. How much? Nobody knows, 5%, 10%. Could be less, could be more. Nobody really knows. We could move sideways, but it looks like we may be correcting a little bit already.
That’s it. Charles Dzama here, CD Financial, empowering you with financial ideas!