How risky is the booming housing market?

·Senior Editor
·7-min read

“The 360” shows you diverse perspectives on the day’s top stories and debates.

What’s happening

The housing market in the United States has exploded since the start of the pandemic, even as other sectors have struggled to recover from the sudden economic collapse that occurred in the first half of 2020. Home prices have increased at a record rate over the past year. In June, the median home sold in the U.S. cost $363,000 — nearly $70,000 higher than at the same time last year.

Home prices have been steadily rising year over year from the lows that came in the wake of the Great Recession. The coronavirus pandemic supercharged that trend, as millions of remote workers seeking larger living spaces — and buoyed by historically low interest rates — lept into a housing market already experiencing a supply shortage. The result has been a frenzy of bidding wars, gamesmanship and desperation that has pushed prices higher.

Unsurprisingly, the current situation has raised questions about whether the U.S. housing market is in the midst of another boom-and-bust cycle like the one that led to the global recession. In 2007, a housing bubble propped up by shaky mortgages burst, triggering a financial crisis that cratered the global economy. The circumstances driving up prices are different this time, but there is still ample debate over whether the spike could lead to another crash and whether aggressive steps are needed to prevent one.

Why there’s debate

Most economists believe a true collapse of the housing market like the one that occurred in 2007 is unlikely because the key factors that made things volatile back then — a glut of buyers being issued mortgages they couldn’t afford and dangerously leveraged financial speculation — aren’t present today.

That said, there are still concerns that the hot market might create problems that stunt the economic recovery or spill over into other sectors. Some economists worry that housing may become a major driver of inflation, which could push up prices on all consumer goods. Others say sky-high home prices will exacerbate inequality by making it impossible for first-time buyers to become homeowners, which could cost the millennials their best opportunity to generate wealth in their prime earning years. Rising home prices also mean higher rents, which hold back lower income Americans and can contribute to homelessness. For these reasons, some experts are calling on the Federal Reserve to raise interest rates and throttle back its bond purchase to cool down the housing market.

Optimists say the housing market is stable and prices will come under control once demand naturally levels off. They argue that the eventual end of the pandemic will reduce the desire for spacious homes and eliminate the need for super-low interest rates, both of which will drive prices downward. This group’s concern is that the Fed might overreact to high home prices and raise interest rates too early, a move that might calm the housing market but could stunt recovery in other sectors of the economy.

Others say that the current situation, whether it’s a bubble or not, highlights a problem that has existed well before the pandemic and may endure long after it’s over: The U.S. simply doesn’t have enough housing. According to one estimate, the country had 3.8 million fewer housing units than it needed at the end of 2020. Housing advocates say solving this problem requires a nationwide effort to reform zoning laws that make it hard to build anything other than expensive single-family homes across the country.

What’s next

As part of his massive infrastructure plan, President Biden proposed $5 billion in grants and tax credits for local governments that start to eliminate exclusionary zoning rules and spur affordable housing development. It’s unclear whether that provision will remain in the final version of the bill, assuming any infrastructure plan makes it through Congress in the coming months.


There is no housing bubble

“The boom produced some frantic buying, bids in excess of asking prices, and plenty of worry among would-be homeowners. But this has not been a bubble. A bubble is not simply rising prices, but demand not justified by fundamental economic factors. The key to the buying boom has been low mortgage rates plus a shift in desired housing type.” — Bill Conerly, Forbes

If the Fed overreacts to the housing market, it could stifle broader recovery

“A gradual buildup beginning later this year could spook markets and feed calls for the Fed to push borrowing costs higher, a move that could choke off economic growth as Democrats fight to hold onto control of Congress.” — Victoria Guida and Katy O'Donnell, Politico

The root causes of high prices are laws that make it hard to build new homes

“The larger villain in America’s housing crunch [is] ... the forces stopping any new apartment buildings or houses from existing in the first place: your neighbors, local laws, and local governments. If we can’t see the culprit of America’s housing crisis, that’s because we’re eager to look everywhere except in the mirror.” — Derek Thompson, The Atlantic

Housing is just one element of an economy-wide bubble that needs to be controlled

“Not only is the Fed further inflating the U.S. housing market bubble but it is also inflating the global everything bubble. That has to be heightening the risk of a hard economic and financial market landing when the Fed is forced to raise interest rates to cool an overheated U.S. economy.” — Desmond Lachman, National Interest

People will struggle until governments make housing citizens a top priority

“Evidence from numerous studies clearly demonstrates the benefits accrued when people are adequately housed — health improves, children do better in school, employees are more dependable, people experience less depression, crime rates fall. So why isn’t it obvious to everyone in government that we need to take drastic action?” — Richard F. Burns, The Hill

The end of the pandemic won’t solve the underlying issue behind the crisis

“Whether we call it a housing bubble or not, the current situation is untenable. Prices are rising, homeownership is increasingly out of the reach of many Americans, and the alternative (renting) is also increasingly expensive, especially in the most job-rich parts of the country. This is an unhealthy, unstable, and unacceptable state of affairs. And it was entirely preventable.” — Jerusalem Demsas, Vox

The bubble won’t burst, but it could deflate

“Eventually, rising prices will decrease the pool of eligible buyers. Strong market demand will continue to stimulate supply. Credit rules might ease. ... A market equilibrium could be on the horizon. But it’s a far horizon. It’s unlikely we’ll hear a pop like the deafening bang of 2008. More likely, it’ll be a long, flatulent sound of air being let out of a big party balloon.” — Kim Shanahan, Santa Fe New Mexican

There’s little risk of a 2007-style financial collapse, even if prices keep rising

“In contrast to the run-up to the financial crisis, mortgage products today are significantly more conservative. … The banking system is also much less vulnerable to a bursting housing bubble today.” — Jeff Taylor, MarketWatch

Unless the Fed helps push prices down, an entire generation will fall behind

“The central bank's support for an already-booming housing market risks locking first-time home buyers out of the market. That would be a very negative outcome given that owning a home is the way many Americans build wealth. How many Millennials are likely to have enough money saved to make all-cash offers?” — Matt Egan, CNN

There are already signs that prices may be coming back down to earth

“The cure for high prices is high prices, to paraphrase a famous saying from the commodities world. There's evidence that buyers are providing the cure, staying away from the high prices and cooling the market by collective action — or inaction.” — Ben Winck and Andy Kiersz, Business Insider

The higher prices get, the more inequality is perpetuated

“Soaring home prices may not be as destabilizing to the financial system as they were in the last bubble, but they do contribute to rising inequality by boosting the wealth of homeowners at the expense of renters.” — Peter Coy, Bloomberg

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