Episode Details

Call it a perfect storm of conditions to keep home prices on a steady upswing as buyers clamor after too few homes. I had the opportunity to talk to HousingWire's lead analyst Logan Mohtashami about the unusual situation we're seeing, and whether all those scary headlines about a housing bubble are true.

The housing market has been breaking all sorts of records. It's never been so hot. Asking prices have hit an all-time high. Selling prices have hit an all-time high. The share of homes selling over list price is also breaking records. I noticed a crazy headline the other day. It said: The East Bay real estate market is so hot, houses are selling for more than $1M over asking price." That's a jaw dropper for sure!

That headline appeared in the SFGate in reference to the San Francisco East Bay. One realtor said in the article that it's not that surprising when they get an offer like that. Josh Dickinson says: "When my clients see a house for $1.9 million they're almost conditioned to think it'll go over $3 million in Piedmont or North Berkeley."

Buyers are so desperate to land a home, many are sweetening the deal with things other than money. According to SFGate, one buyer offered free one-week stays at an Airbnb in Tuscany for the next ten years, but still lost the bidding war. Stock options and airline miles are also popular.

That's undeniable evidence of housing market demand, but it isn't the whole story, and it doesn't provide an answer to the housing bubble question. In 2007, housing prices hit bubble territory against a backdrop of poor underwriting and buyers who couldn't afford their homes. When the Fed raised short-term rates, adjustable rate mortgage payments skyrocketed, home prices sank, and many borrowers defaulted. Logan says it's a whole different story today and one that is very far from a bubble.

He says that today the housing story is all about demographics, low mortgage rates, and low inventory. Despite previous beliefs that millennials would never get married and settle down, they are now trying to do just that. Logan says we're at the start of a unique period when millennials who are 27 to 33 years old are ready to buy. Since many of them are highly paid employees in the tech industry, higher-priced homes and bidding wars may not be a big problem. And if they want to get away from the high-priced homes, it's very likely that they can do their work remotely, from a smaller metro where homes are less expensive.

Mortgage rates are still very close to an all-time low. They hit rock bottom because of the pandemic, and are still under 3% right now. So even though home prices are advancing skyward, mortgage rates are very attractive. As Logan pointed out, they are lower than they should be. In 2018, they were up near 5%. In 2019, they dropped a bit, but it was COVID-19 that brought them to a record-setting low. Freddie Mac shows the low point in December of last year with the 30-year fixed-rate mortgage at 2.68%.

And the inventory problem is only getting worse, making the homes that are available that much more desirable. Logan says from 1985 to 2007, the average number of years was five, before families would move. Now, it's more like 10 years. So there's less turnover of homes to replenish the existing home inventory. Covid made that situation even worse, as potential sellers decided to stay put. And many of those who have vacation homes are now living in them instead of renting them out. Plus, builders haven't been able to make up for the deficit.

Logan says the pandemic didn't create this scenario, but it did contribute to it. He says Covid brought mortgages lower than they would have been and that home prices accelerated beyond the normal trend. And there's little chance of a foreclosure crisis. That's another scary headline that is unlikely to happen. Logan says it's not going to happen because we just don't have the kind of bad credit that we had be