In an economy where “cash is trash” and everyone knows that real assets are best to own in an inflationary environment, is it possible that this mass consensus has led to a bubble in the real estate market? The Federal Reserve Bank of Dallas cautioned a month ago that we might be seeing a fear-of-missing-out wave of speculation taking place in the market.
They note that the rental income derived from properties is not rising as fast as home prices, which might signal a valuation divergence from fundamentals. The growth in the price-to-rent ratio is comparable to that of the run-up of the last housing boom.
Others like Jeff Tucker, a senior economist at Zillow, disagree. He believes that although the market is shifting to more of a buyer’s market, demand for homes remains so strong that it’s unlikely we will see a significant reduction in home prices.
Talk of a bubble could be worrisome to new home buyers, who have been sidelined from purchasing due to the rapid rise in prices over the pandemic years. Construction companies could put their plans on hold, preventing inventory levels from bouncing back to higher, more sustainable levels.
Real estate prices in Beverly Hills have begun to signal a cool down, dropping 7.1% compared to last year. Homes are selling more quickly, however, with a median of 48 days on the market compared to 61 last year.
Whether we are witnessing a bubble burst in the market or a temporary cool down is up for debate. If macro economic conditions recover and the Fed is able to achieve a “soft landing”, however, we are bound to witness continued strong demand for real estate.