Are we in a housing bubble?
Everybody is buying a house. Should I get one too?
Hi everyone! So here we are, money is cheap, people are encouraged to get a home loan, the housing price is squeezed up as demand soars. Is this healthy growth? Or is this just another bubble?
The US housing market has grown 16% year on year. This launches a FOMO for everyone who has access to credit. The upper-middle-class, the 0.1 percent, and yes even the private equities are on it! Money is so cheap that even PEs have nothing else to grab they take on the private housing market!
So how does this work? A little reminder, we as individuals look for investments. We would love to get some interest as an incentive for our effort in putting aside some money. Today the interest rate is close to zero. The central bank gives close to zero to commercial banks, the banks, in turn, give you even less interest (they have costs to cover right?). So what else do we have? Stocks. Yes, stocks but for most people, stocks are volatile, unsafe, and risky. So what else do we have? Gold. Yes but gold doesn’t give you interest and you cannot have leverage like a house loan where you typically get 1 to 10 leverage (you pay in cash 10% of the house and the loan pay the rest).
So yes, despite the fact that a house is less liquid than a stock (it takes you more effort and more time to sell it), seeing that it has amazing growth in value, people jump on it! Out of need maybe because of the new trend of remote working but also because of FOMO! In the money printing world, we are afraid that there will be hyperinflation where the value of money drops so quickly that you want to buy ANYTHING whose price will drop slower than the value of the money.
So yeah here we are, we are despite past experiences, in a new housing bubble. Frankly, if you expect hyperinflation to come, it’s like you’re expecting America and the world to go down. Will it happen? To be honest I don’t think so. But do I think that the housing is overleveraged? If it continues yes I guess. But please take my analysis with a grain of salt since I’m not an economist.