a fake redfin listing for a cardboard box on skid row

One of the best ways an average person can build wealth is by investing in a home. Unfortunately, in today’s market doing so is not easy, unless you are running a hedge fund or happen to have hundreds of thousands of dollars in cash sitting in your bank account. Inventory across the country is low right now because some sellers don’t want to list their home and move during a pandemic. The government has also put a halt on evictions and foreclosures since last year. These moratoriums are currently set to expire on June 30, however the Consumer Financial Protection Bureau (CFPB) recently released a notice of proposed rulemaking that would prohibit servicers from starting foreclosures until after December 31, 2021.

Unfortunately, demand for homes has not decreased and actually seems like it has increased. The end result is there are a very low number of listings on the market, and a lot of buyers competing over those listings which is driving up prices. In fact, in some markets, the number of homes in escrow is actually higher than the number of new listings. This is causing some buyers to panic and spend whatever it takes to get their offer accepted. Some buyers are even offering $50-100k over list price and waiving appraisal contingency.

Please keep in mind I’m not a professional financial planner and nothing in this article or the rest of this site constitutes investing advice. That said, I’m not going to say that we are definitely in a housing bubble right now, but there are some aspects of the current market that make it look like we could be. To begin, let’s take a look at the definition of a bubble.

A housing bubble is a temporary event, but it can last for years. Usually, it’s driven by something outside the norm such as manipulated demand, speculation, unusually high levels of investment, excess liquidity, deregulated real estate financing market, or extreme forms of mortgage-based derivative products—all of which can cause home prices to become unsustainable. It leads to an increase in demand versus supply.

Investopedia Staff. “Housing Bubble” Investopedia, 25 Dec 2020. <https://www.investopedia.com/terms/h/housing_bubble.asp>.

In this case I would consider the pandemic something ‘outside the norm’ and we definitely have a lot more demand versus supply at the moment. So again, I would argue that there is a chance that we could be in a bubble. So if we could be in a bubble, what might happen to the people that are buying houses for more than they are worth right now?

Well, if you look at what happened the last time we saw a significant correction in the housing market, a lot of homeowners ended up owning a home that was worth less than what they paid for it. This didn’t end well for a lot of people. Consider the following scenario. Joe has worked hard over the last 10-20 years and managed to save $100,000. Joe also got married, recently had a couple of kids and is finally ready to buy a house. Joe sees what is happening in the current market and starts to panic. While experiencing a tremendous amount of FOMO (fear of missing out) he ends up paying $50,000 for a home he doesn’t really like. Six months later the eviction and foreclosure moratoriums are lifted and a bunch of supply hits the market. Interest rates also rise, and as a result the value of the home Joe bought goes down by $50,000. Joe starts to experience a lot of stress since he’s stuck in a home he settled for that is now worth $100,000 less than what he paid for it. The stress eventually impacts his job performance, and he ends up getting fired and having to declare bankruptcy.

This is just a hypothetical situation, and I’m not saying this is definitely going to happen to people that buy a home this year. Having said that, I do think there is a chance something like this could happen and potential homebuyers might want to be careful right now. If you are in a similar situation and feel like you must buy a home in this market you should get a good realtor. Someone that knows it is going to take a lot of effort to find the right home for you and is willing to put in the time and effort it is going to take to be successful. Once you have done that, don’t pay too much for a home, and be prepared to stay in that home for several years if your offer is accepted. You should also make sure that you have some money available in case of an emergency once you purchase the home. The other option would be to hold off on buying and wait for things to get better.