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Housing prices are skyrocketing in cities and suburbs across the country, and bidding wars are common.
Are we in another housing bubble? MarketWatch contacted Daryl Fairweather, chief economist of real estate brokerage Redfin
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to find out. Fairweather earned her bachelor’s degree from the Massachusetts Institute of Technology and master’s and doctorate from the University of Chicago, where she studied behavioral economics with Nobel Prize winner Richard Thaler.
The text of our interview, edited for readability, follows.
Howard Gold: The Case-Shiller index is up year over year by the highest rate in 15 years. Redfin has all kinds of mind-blowing statistics about the increase in housing prices. Do you think we are in a housing bubble now?
Daryl Fairweather: I wouldn’t use the word bubble, because bubbles burst and I don’t see any signs of this bursting any time soon. What’s happening right now is large demand for homes, because of mortgage rates, because the pandemic has people spending more time at home with remote work and encouraging people to move farther out. And at the same time there really isn’t much supply of homes at all. The fewest homes were built in the 2010s compared to any other decade going back to the 1960s.
Q: The smallest number of homes were built in the decade of the 2010s, going back to the 1960s?
A: Yes. Builders really got scared at the last housing crash and didn’t take on new projects or didn’t want to take very much risk at all.
Q: Housing supply is actually down 52.5% year over year, according to your website. How does the supply, the number of homes for sale, decline so much in one year?
A: Homes are going off the market within two weeks or even just one week of [being listed]. At the same time, the number of new listings is down, because people are staying put. If they already own a home, they don’t see a reason to sell. Especially if they have to buy again, they’re going to be facing this really competitive housing market.
Q: Is this a nationwide phenomenon?
A: It’s pretty much everywhere except Manhattan and San Francisco. Even there, home prices are pretty much flat. Honolulu is also suffering a little bit, too, because they’re tourism-based.
Q: Denver and Seattle have been hot for a long time. And Detroit actually showed the biggest increase, 52%. Is that because the market’s been depressed for so long?
A: Well, Detroit is working from a much lower baseline. It’s one of the most affordable markets in the whole country. If a property goes from selling from $150,000 to $200,000, it’s a really big percentage increase.
Q: That’s a bit of an anomaly, and I would assume the same thing is true of another hot market, Cleveland?
A: Yes.
Q: But almost all the others in your top 10 metros are Salt Lake City; Boise, Idaho; three in Arizona; two in Florida; and one in Texas. Are we seeing this continuation of the migration to the Sunbelt that was just reflected in the 2020 census?
A: Definitely it is a continuation of that, but remote work and how unaffordable places like coastal California are is just making it even bigger of a phenomenon right now.
Q: Are we seeing the biggest growth in the suburbs, or are there other central cities that are doing well, in addition?
A: At the beginning of the pandemic, people were looking to the suburbs and rural areas, but now people are returning to the city. It’s usually the more affordable cities like Nashville, for example, where the downtown area is doing just fine. And people still want more space. So they prefer a single-family home in an urban area over a condo, but there are plenty of urban areas that have a good number of single-family homes.
Q: Any in particular?
A: Seattle is one. Seattle has a lot of different mixes of property. Even 10 minutes from Amazon’s
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campus over in Capitol Hill, you can find a single-family home. But it’s going to be really expensive.
Q: In the New York area, Washington, D.C., and Chicago, the suburbs are absolutely booming. Are we still seeing people bidding to buy in the suburbs?
A: Yes. I would say the suburbs still are booming, and so are rural areas. It’s just that the urban market has experienced a much deeper V-shaped recovery, and we’re starting to see urban catch up to suburban and rural.
Q: I read about one fixer-upper in the suburbs of Washington, D.C., which got 76 all-cash offers and sold for $200,000 over the asking price. And I think Redfin said 56% of homes were being sold in bidding wars a couple of months ago. What is the current number, and where do we see the most bidding wars going on?
A: Bidding wars are happening in places with the biggest shortage of homes. Nationwide, almost two-thirds, 64% of home offers [were involved] in bidding wars. That was in March. Salt Lake City, followed by Pittsburgh, Boise and Virginia Beach [had the highest percentage of bidding wars]. We did an analysis of how much cash offers help you win a bidding war, and they quadruple homebuyers’ chances of winning a bidding war.
Q: Who’s buying in general? Is it millennials? The oldest millennials are now about 40. Are we finally seeing millennials enter the home-buying market en masse?
A: Just from a mathematical perspective, millennials are now the biggest generation. They are entering home-buying age. (Note: A report by the National Association of Realtors said millennials are buying 37% of all homes and “continue to make up the largest share of home buyers.”) I think we’ll definitely see a lot more millennials entering the housing market. Unfortunately, there aren’t a lot of homes for them.
Q: What’s happening with the baby boomers? Are they staying put? Are they moving to Arizona and Florida? Are they getting out of the way and letting the younger people buy?
A: We’ve actually seen an increase in people staying in their homes longer — 13 years is the median, I believe. They don’t want to go into retirement communities as much. They’d rather just age in place. Twenty-five percent of homeowners have stayed in their home for more than 20 years, which is the highest share we’ve ever recorded.
Q: Homebuilders’ stocks have done extremely well. Have you seen builders step up their activity so that maybe the 2020s will be a much more active decade for home building than the 2010s?
A: Yes, they are. But they are facing some challenges. There’s a lumber shortage. It’s hard to ramp up, get skilled labor, build the homes. They’re definitely building more, but it’s not enough to slow down price growth or really add substantially to inventory. The good news for builders is that people are moving to places where land is more abundant. It’s much easier for them to build in the outer suburbs.
Q: The outer suburbs and exurbs did very well in the housing bubble before the crash. That’s where a lot of McMansions were built. Have they come back, again?
A: They’re coming back. There’s this one community called Mountain House in the suburbs of the Bay Area. It got hit really hard by the last housing bubble burst. (Note: In 2008 the New York Times reported it was “the most underwater community in America” because many homes had negative equity.) Now it’s one of the hottest housing markets in the whole country.
Q: Is there any particular area of weakness in this market?
A: Condos got really hit hard by the pandemic. People want more space; they don’t want to share amenities. But they’re coming back. For the time being, you can still get a decent deal on a condo.
Q: Single-family homes are where the action has been. Is that because people want more room to build a pool or additions? Are people looking for more space and flexibility with their living area?
A: They want more space. They want the home office. They want a private outdoor area, all that.
Q: You said early on, we’re not in a bubble. What do you see over the next year or two?
A: Once the economy reopens, people will want to spend their money on things besides housing, like on a vacation or entertainment. So the fierce demand will cool down a bit. And I also think that mortgage rates will come up once the economy recovers both in the U.S. and globally. That will slow down demand a bit, and the market will just get a little bit more balanced. We’ll go from 10 offers on a home to maybe only one or two offers. Still a strong housing market, but just not as ridiculous as it is right now.
Q: Do you have a prediction for rates on the 30-year fixed mortgage?
A: Mortgage rates will come up to maybe around 3.5% by this time next year. (Note: According to Bankrate, the benchmark 30-year fixed mortgage rate was 3.11% Thursday.) The U.S. is pointing to a really strong recovery, and mortgage rates could stay low if the whole global economy is weak.
Q: If we’re not seeing a housing bubble now with bidding wars in two-thirds of houses sold and dozens of people trying to buy a single home, what would it take for us to have a real bubble?
A: We’ve had about a year of this really rapid price growth. If this continues for, let’s say, three years, then it starts to become speculative, where people will buy a home assuming that home prices go up this much every year. That’s when I would definitely start to worry. Because when people start to speculate and buy homes for the purpose of selling them rather than living in them, then you have to worry about that bubble.
Q: Massive flipping.
A: Right.
Q: Thank you.
Howard Gold is a columnist for MarketWatch. Follow him on Twitter @howardrgold1.
