Current bidding wars are pushing housing prices up to record high levels. Is this a sign of a housing bubble?

From 2006 to 2008, what drove home prices up were two items. First was speculation on home prices, with investors buying with the expectation of appreciation as opposed to the need for housing. Second was people being given loans they were not qualified to hold, including a lot of risky loan types that allowed people to initially get into homes only to see their payments rise later. So leading up to the housing crash of the Great Recession, we saw speculation, overextended credit, and other factors that led to artificially high prices.

Today’s market boils down to the simple economic principles of supply and demand. The lack of supply in the DC area dates back to the recession—when builders could not get loans to construct new homes, even as the population in DC was growing.  Their efforts to increase the supply are now restricted by the lack of available land close to the city to build detached homes and townhomes, and where they can build, supply chain issues are holding up completion.

On the demand side, the number of new jobs coming to the DC area, and the entry into the housing market of Millennials (the largest home buying generation ever), have combined to swell demand beyond anything seen before. Nice homes are still getting 8 to 12 offers, in each case leaving 7 to 11 buyers still needing a home after the bidding is done. What is happening now in the market is not a bubble, but organic and sustainable growth.

Additionally, the market has been driven by much healthier, fixed-rate and 30-year mortgages that give owners certainty after buying. We have much stronger borrowers and less risky loan products. This, along with lenders taking fewer risks when it comes to qualifying buyers, has led to foreclosures in 2021 dropping to the lowest rate since tracking began in 2005.

For potential buyers, waiting for a bubble to burst is likely going to put you in a place where you’re paying the same price (or more), but at a much higher interest rate.