All of us perhaps have been watching the craziness in the real estate market. Home prices have seen an unprecedented surge across the country. The index of home prices across 20 large markets surged 12% on a yearly basis this past February, according to the S&P CoreLogic. Buyers have resorted to aggressive tactics in the market and there have been reports of offers made all cash, sight unseen and often with inspection and other contingencies removed. One wonders if this trend is supported by economic fundamentals or is a bubble in the marking? The word bubble does scare us as it brings the horrors of the 2008 crisis, which emanated and in the end destroyed the housing market.
One could be tempted to assume that the inflation home prices are seeing makes for a real estate bubble. We argue that is not true. In fact if you talk to any real estate expert, they will tell you the same thing. Real estate across the US is on fire, no doubt, but there are some very strong fundamental reasons behind the trend. Reasons that have been exacerbated by the COVID pandemic but have been at play before the pandemic.
Housing if viewed as a commodity has to be driven by supply and demand and the equilibrium price is where the supply meets the demand. Housing in the US is in an extreme shortage. The supply of new homes reached a new low earlier this year (~2 months, or a number which represents how long it will take to sell out of new supply). Furthermore the pandemic has caused disruptions in the global material supply chains leading to a surge in cost of construction (lumber and steel). Combined with a low interest rate environment, this makes for a perfect storm in the housing market. These are some of the reasons we think that the surge is “not” a bubble. In fact its rooted in some rather large economic forces at play.
How may this affect the multi-family apartment market? Rather closely actually. The market for single family homes is a very closely related cousin of the multi-family apartment markets. Similar forces affect both the markets. While you may not read a lot about that in the media, there is an unprecedented surge in the valuations in the apartment market as well, due in part to the very same reasons elucidated above.
In summary, real estate is not in a bubble, at-least not yet. The surge may continue or temper in the coming months, we don’t know. Albeit, there are fundamental reasons behind the surge. This makes the bubble theory not applicable at-least in our opinion. What do you think?