Bubble or “New Norm”? Some Thoughts on the (Near) Future Real Estate Market

Start typing in the Google search bar “Is the real estate market in a bubble right now?” and you’ll quickly see that thousands of other people are asking the same question.

No one knows what will happen, but it’s human nature to keep hoping for an answer.

And since no one has an answer, the next best thing is a well-educated guess.

And the best-educated guesses about the real estate market are the most open-ended ones.

In other words: it depends. It depends on several things, actually.

Before I go into what those things are, I think it’s important to mention that the real estate market is still in a state of flux right now. Come back in a month and I might have a different response.

There are several drivers behind the sky-high demand in the current market. These include low interest rates, immigration patterns, demographics, supply chains, and inventory.

For each of these, there is more than one possible scenario.

  1. Interest Rates

This is probably the most obvious driver. Plenty of prospective homeowners feel that now is the time to buy since interest rates have hit record lows.

If interest rates continue to stay low, we will most likely see continued demand for homes — leading to prices remaining high.

However, inflation tends to be the consequence of policies and other artificial measures to keep interest rates low. If inflation becomes more serious, interest rates will inevitably rise, leading to a cooling off of the market.

Also consider that even if interest rates remain low, at some point real estate prices will hit some kind of ceiling. The higher prices go, the fewer buyers there will be out there who can afford those prices, even at an “affordable” interest rate.

2. Immigration Patterns

This is one of the most interesting factors at play with today’s real estate market.

The pandemic of 2020 launched what was essentially a nationwide game of musical chairs: people from cities (and suburbs) left their homes to move to the suburbs and even rural areas. Many of these people moved out of state. The novelty of being a homeowner and living somewhere else, thanks to being able to work from home, became a huge motivator.

The question is, will these recent immigration patterns remain fixed? Now that the pandemic is mainly on the retreat in this country, employers are starting to require their employees to spend more time at work in person.

People will continue moving to hotspots like Florida and Texas for the time being, but it’s also very possible that there will be a tapering off of immigration overall, once the FOMO and novelty of living elsewhere/working from home begin to wear off.

We won’t know for sure either way how the game will end until the music stops.

3. Demographics

Millennials took a lot of heat for a number of years for being okay with living in their parents’ basements.

Now it appears that many Millennials are ready to start forming their own households and clearly, they are doing so. They are a key demographic in the current demand for homes.

Whether enough of them will find homes for the time being (or content themselves with waiting) will be a factor, most likely, in where home prices are at.

An exacerbating factor, arguably, are Baby Boomers who are not ready or willing to sell their homes yet. Traditionally the older generations begin to move on to retirement homes to make room for the younger. But as long as Boomers continue to prefer living in their houses we may see a continued housing shortage, leading to continued demand.

4. Supply Chains

This is one that I see being rectified over the next year or so. Because the pandemic came on so suddenly (not to mention unexpectedly), suppliers (lumber, appliances, etc.) were simply not able to keep up with demand.

Of course, there have been some complicating factors: a shortage of employees in blue-collar industries has made it harder for manufacturers to step up their output, for one thing.

It may take longer or shorter for supply chains to catch up with demand, but unless something untoward happens, I see this as happening at some point before too long.

5. Inventory

At the end of this month, the federal moratorium on evictions will be lifted. While a few states will continue to use state-wide measures to prolong the moratorium, we should see a number of property evictions happening at the beginning of next month.

As a result, property owners who are tired of being landlords will be ready to sell.

The main question here is: how many properties will return to the market when this happens? Will it be a flood or more of a trickle?

Besides the moratorium, there are a few other ways that inventory could increase. People who were previously too nervous about putting their homes on the market due to the pandemic and uncertainty of the times may now feel more emboldened.

Some older folks may also be ready to make the jump to a retirement community now that they don’t have to worry about “lockdown” and not being able to leave — although as I said earlier, more and more people seem to be choosing to stay put, even as they age. Mortality and health ultimately will decide where they (and their homes) go, and it’s still too early to tell.

Bottom Line

All of these drivers are currently influencing the real estate market. There is also no question that things will continue to change: there will be evictions after moratoriums are lifted, interest rates will fluctuate, and so on.

The real question is, which of these things will be the main driver for determining the near-future real estate market? I don’t necessarily think we’re in a bubble, but things never stay static either.

Which of these drivers do you think is the biggest?

And are there any other important drivers I may have overlooked? Let me know in the comments below!