With home prices soaring, shoppers fear buying at the top of a bubble

By Doug French

Google reported in April that the search question “When is the housing market going to crash?” had spiked 2,450 percent in the past month, according to Diana Olick of CNBC. “Why is the market so hot?” searches had doubled in just a week.

Since 2008, everyone has been on bubble watch. The price of anything goes up, for any sort of reason, and it’s deemed a bubble, soon to be popped. The large number of searches implies those shopping for a new home are wondering if they are walking into a trap. Home prices have soared and no one wants to buy at the top. 

Olick wrote, “And, in the most telling indication that the market may be in a bubble, ‘How much over asking price should I offer on a home 2021’ jumped 350% in that same week.”

However, home construction over the past decade has lagged behind, as many builders went belly-up in the 2008 crash and large builders have managed inventories more carefully. 

According to Freddie Mac, the US housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, wrote Nicole Friedman for the Wall Street Journal. 

Natalie Campisi of Forbes explained, “The housing market has been struggling to keep up with demand since the 2010s when the number of new homes built was slashed in half compared with the previous decade. As the demand for residential real estate has increased, the scarcity of homes for sale has created a logjam on the supply side.”

The usual problems are foiling homebuilders, according to Ms. Campisi: “increased lumber prices, limited lot supplies, supply-chain issues, restrictive zoning laws, costly permits, and a skilled labor deficit.”

This generation of skilled labor was neutered long ago when parents insisted their kids go to college so they could get office jobs. At the same time, in population centers, neighborhood associations band together to stop any new development in their backyards. Especially any proposal for affordable homes. 

With covid sending municipal staff home to work remotely, the entitlement and permitting process has been slowed by months here in Las Vegas, according to a knowledgeable observer.

This is not your grandfather’s housing market. Blackstone Group just spent $6 billion buying Home Partners of America Inc., which owns more than seventeen thousand houses throughout the US. Some simple arithmetic generates a price per unit of more than $350,000. Compare that to Blackstone’s $7.5 billion purchase of forty thousand homes from 2011 to 2013, or $187,500 per unit.

In between, the firm exited from the single-family rental business when it sold its last shares in Invitation Homes in 2019, which had become the largest US firm in this industry, with eighty thousand homes for lease. 

Last year, Blackstone put “its toe back in the market in 2020 by investing $240 million to buy a preferred equity stake in Toronto’s Tricon Residential Inc., which buys single-family rentals in North America,” writes Peter Grant. 

Blackstone is not alone, rejoining an expanding roster of Wall Street powerhouses that have acquired single-family rental companies, according to Grant. “Canadian property giant Brookfield Asset Management Inc. recently acquired a stake in a landlord that owns more than 10,000 U.S. homes. J.P. Morgan Asset Management and Rockpoint Group LLC also have made big investments in single-family rental operators.”

Buyers large and small pushed the median existing-home sales price in May to $350,000 for the first time, according to the National Association of Realtors (NAR). That makes for a nearly 24 percent increase from a year ago, the biggest year-over-year price increase NAR has recorded in data going back to 1999.

Of course, trees don’t grow to the sky. “Affordability appears to be now squeezing away some buyers,” said Lawrence Yun, NAR’s chief economist. “There are so many people who have been outbid, frustrated they are unable to buy.”

Raoul Pal of Real Vision says one should compare home prices to the Fed’s balance sheet. He claims the median price index is flat by this metric. Actually, by my calculations home prices are falling in relation to the Fed’s assets. When the median hit $350,000 recently, the Fed’s balance sheet was nearly $8 trillion.

Back in the first quarter of 2007, when the median hit $257,400, the Fed’s footings stood at a mere $862 billion.

The central bank didn’t start its exponential growth spurt until the dark days of September 2008. And it’s never looked back. Will housing prices do the same?

Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.