Low inventory means housing bubble won’t burst

CONTRA COSTA COUNTY, CA (July 18, 2022) — Q. What factors cause a housing bubble? Are we in one now?

A. A housing bubble can grow when there is a lot of demand along with the ability to buy. It forms when prices rise quickly and rise above affordability.

As prices become less and less affordable, the bubble can get so big that it is out of reach for most people. Sales slow and inventory stays on the market longer, which builds more inventory. Supply and demand get out of whack.

Our recently scarce inventory is now growing. This will cause prices to drop, and the air can slowly or quickly leak out of the bubble. This hurts sellers but is good for buyers – the opposite of what we have been experiencing for at least the last few years.

If this happens, it can be called a crash. Elements that can cause a crash include loans suddenly becoming harder to get, mortgage interest rates rising too quickly, an economic slowdown causing massive deflation and jobs disappearing too quickly, along with demand.

Based on supply and demand, many experts don’t expect a crash in the next few years. We still have low inventory and don’t see that changing in the foreseeable future.

One factor that feeds into that is the Millennials. They will be controlling the housing market for a long time to come, just as the Baby Boomers did. The Millennials are the most educated group of people in history. The largest group of them is 29-32 years old, and the most active age for home buying is around 32.

Many of the Millennials will be first-time buyers, so affordability will remain key as well as quality of life. Millennials are looking for family-friendly suburbs, such as those in Contra Costa County. But some will leave California for much more affordable places like Austin, Nashville and Boise.

Rising Interest Rates

Q. The Fed keeps raising interest rates. Are they trying to ruin the housing market?

A. I always refer these types of questions to a smart lender, Jay Voorhees of JVM Lending. He said the Federal Reserve does not control mortgage rates.

Actually, mortgage rates went down 3/8ths of a percent after the Fed raised rates 0.75% on June 15. That is because the Fed raises the short-term funds rate that banks pay to each other overnight. The Fed does not control long-term rates like the 10-year Treasury bond or the 30-year mortgage rate. The Fed can influence long-term rates with its comments, but it doesn’t have the final say.

Voorhees says the bond market has the final say, and that is exactly what we have been seeing over the last few weeks.

Based on experts’ comments, my prediction is we will not have a crash in the next five years – but rather a slowdown and perhaps prices leveling off or actually going down. But it won’t ruin the economy.
Thank you, Millennials.

Contact Lynne French at lynne@lynnefrench.com or 925-672-8787.

Lynne French
Lynne French
Realtor at Compass Real Estate | 925-672-8787 | lynne@lynnefrench.com | Website

Lynne French is a Realtor with Compass Real Estate and captain of the Lynne French Team. Originally from Chicago, Lynne French came to San Francisco at the height of the 1960 and started a boutique at age 21. She went on to open two other shops. As industries shifted, Lynne took off on an adventure as a truck driver. For 10 years Lynne owned, operated and drove her big rig throughout the 48 states. One day, her truck broke down for the last time, and it was time to move on. In 1993 an ad for real estate training caught her eye and she began her real estate career as an assistant. Eventually she struck out on her own and had to hire her assistant to handle the volume of work. Lynne's decision to become an office in 2005 came from a sincere alignment with three basic principles: hire the best people, give them the best tools, create thriving communities. When not helping her clients, Lynne and her husband Danny enjoy country living within the foothills of Mt. Diablo.