With home prices soaring, is this the start of a real estate bubble?

‘What goes up, must come down’ is a basic law of physics. Now the question is whether this applies to our current real estate market. It’s a question a lot of people are asking as home prices, particularly those of single-family homes, soar despite the uncertainties of the overall economy.

Daryl Fairweather, the chief economist at Redfin, said buyers are acting fast when they see a home they like in this market.

“The housing market is really strange right now,” Fairweather said. “Nearly two-thirds of homebuyers are making an offer sight unseen over the last year.”

The Greater Boston Real Estate Board found prices on single-family homes are up 13% over the past year. Supply, on the other hand, is down 33% over the same time period.

Fairweather said the pandemic has changed the relationship people have with their homes. “People are spending more time in their homes, and that’s motivated a lot of people to seek out a new place to live because they want more space or want to live in a different area.”

This change in attitude coupled with low-interest rates has been the catalyst for the increase in prices. It’s also raising some concerns that a real estate bubble might be ready to pop.

Fairweather isn’t worried – yet. “I do think that once the pandemic starts to end and things get back to normal, that some of that heightened price appreciation should start to slow down, and if it doesn’t, then I might be concerned.”

Keren Horn, an economics professor at UMass Boston who specializes in housing issues, said she sees some warning signs from the hyper-appreciation of housing prices. “Income and wages are not growing as fast as housing prices,” she said.

With home prices soaring, is this the start of a real estate bubble?

Like Fairweather, Horn sees the current price spike tied to the changing way people live today. She said a chronic shortage of new housing starts compounds the problem.

“I think one of the critical warning signs that people look for is, is it driven by speculation, is the demand for housing driven by an unsustainable force, with people flipping houses; and I think in this case, the rise in the price of housing is really driven by a stable demand,” Fairweather added.

Both economists think the price increases will start to cool this spring.

“I think supply will probably go back to where it was,” Horn said.

“As we start to come out of this pandemic, as we get more vaccinated, we’ll start to see an increase in new listings,” Fairweather added.

Horn said one of the troubling aspects of this price appreciation is how it fits into the ongoing problem of the wealth gap. While it’s increasing the wealth of current homeowners, it’s making it more difficult for first-time homebuyers and those with more modest means to enter the market at all.

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