The concern about housing being in a bubble has dominated a lot of conversations over the past couple of years, especially as people referenced the 2005-07 period as a baseline. While the two periods are not alike (2005-07 saw significant oversupply, no-doc no-income loans, subprime/Alt-A loans and loose underwriting), we did see a similar run-up in prices. With the government response to the pandemic adding a massive dose of fiscal stimulus, in addition to the monetary response from the Fed, liquidity in the housing market became generous and we saw historically-low mortgage rates. Naturally, with “cheap money” it was easy to bid up prices on a limited number of homes for sale.

And as mortgage rates doubled this past year, we’ve also seen the correction in prices. As of January 2023, we’ve seen median list prices decline 11% across the country. That being said, current economic and market fundamentals do not point to a burst/crash. Employment remains solid, with most people who have a job seeing wage gains. We have 11 million open jobs and half as many unemployed people looking to fill them. Mortgage rates have been sliding from the 7%+ in October/November. In addition, there are still markets in the US where demand for housing remains robust.

Importantly, we still have a housing market which is undersupplied. By Realtor.com’s calculation [https://www.realtor.com/research/us-housing-supply-gap-nov-2022/], the gap between the number of new households which were formed in the last 10 years (population growth) and new homes constructed is above 5 million. With that shortage, as long as the economy remains resilient, given the number of millennials, and now also Gen Z in the 26-35 age group, I expect demand for housing to remain solid.

Yes, the record-low rates which fueled overheated prices are behind us, and we’re seeing that correction take place. At the same time, it would take a combination of deep recession with massive job losses plus major new construction inflows to inflict a steeper correction on home prices. Bottom line, I expect to see more divergence in pricing and market dynamics based on geography and location, meaning, some markets will see prices decline while others may still see growth this year. - George

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