The housing market is hot, but not necessarily a bubble : The Indicator from Planet Money Housing prices all over the country are rising at historic rates. Some are concerned about a housing bubble and crash like the one in 2008. So what's happening?

Home prices could fall, but is it a bubble?

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC'S "WAKING UP TO THE FIRE")

ADRIAN MA, HOST:

Are we in a housing bubble?

CHRIS ARNOLD, BYLINE: Are we in a housing bubble?

MA: Are we in a housing bubble?

ARNOLD: It is a big question on the minds of a lot of people - right? - 'cause whether you've been trying to buy a house or you just bought one, home prices have been going bananas, up more than 30% in just the past couple of years. And in some places, the run-up is even more dramatic. If you factor in mortgage rates in some places, it's gotten twice as expensive to buy basically the same house in two years.

MA: Yeah. This is a historically fast increase. And naturally, people are starting to wonder, is the housing market growing so fast that this pricing bubble we seem to be in will eventually burst and home values will crash?

ARNOLD: And it's not unreasonable to actually get worried about this - right? - because last time around, the housing bubble burst in the late 2000s, and the result was millions of people lost their homes to foreclosure. Millions more lost their jobs, declared bankruptcy. The entire country went into the Great Recession.

This is THE INDICATOR FROM PLANET MONEY. I'm Chris Arnold.

MA: And I'm Adrian Ma. And today, Chris, you have joined us to share some of your reporting from this frothy, I guess, housing market.

ARNOLD: Yeah, it's frothy. And today on the show - are we in a housing bubble? Will home prices fall, and by how much? We are going to answer those questions.

(SOUNDBITE OF MUSIC)

ARNOLD: So prices are up around the country. And the kind of crazy part of it this time is that it's not just in places that we used to think of as having super hot housing markets. I mean, prices are way up in Boise, Idaho, and Dalton, Ga., and Nashville, Tenn.

MA: And that matters to Chelsea Fitzgerald-Dole and her husband, Kevin, because they live in Nashville.

CHELSEA FITZGERALD-DOLE: I fell in love with the city. I met so many incredible people.

KEVIN DOLE: The food scene is awesome. The music scene is unparalleled. It's a really fun city to be in.

ARNOLD: But they have been thinking of getting a bigger place. Their current place is, like, really, really small, and they've been crammed in there, working from home remotely.

MA: And Kevin is also a musician on the side, and his drum set is in the middle of the living space.

FITZGERALD-DOLE: This is an electric drum set, but it is a full-size, professional quality, straight up drum set.

ARNOLD: Oh, yeah. Look at that. That is a no joke, serious big drum set.

FITZGERALD-DOLE: Yes.

(SOUNDBITE OF DRUMS)

ARNOLD: Chelsea's home office desk is literally, like, 15 feet away from the drum set.

FITZGERALD-DOLE: I have recently invested in a great pair of noise-canceling headphones that has been super helpful.

MA: You mean she doesn't want to hear constant drumming when she's, like, doing work?

ARNOLD: Clearly, she doesn't love Kevin.

MA: No, I think it's a sign of just how much she loves Kevin.

ARNOLD: She does. She does. She totally loves Kevin.

MA: But you get the idea. Chelsea and Kevin need more space. But as a couple, they don't make a ton of money, and they also have a lot of student loan debt.

ARNOLD: And home prices have gone up so much in Nashville. It's, like, up 45% in just the past two years. And if you factor in interest rates, it's gotten basically twice as expensive to buy a house - $1,000 more per month for the median-priced home.

MA: I mean, that is a dramatic run-up in prices. And Kevin and Chelsea think something just does not feel right.

DOLE: I believe that it is a bubble. I just don't know when it's going to burst.

FITZGERALD-DOLE: This can't last forever. Whatever it is that's happening - you know, all of the locals being pushed out of Nashville and people not being able to afford homes - it just can't keep happening.

ARNOLD: You mean prices can't keep rising like they have been?

CHELSEA FITZGERALD-DOLE AND KEVIN DOLE: Yeah.

MA: Just about all economists agree on this last point. Home prices have to level off, or at least just grow more slowly. Too many people just can't afford to buy now.

ARNOLD: So to figure this out, we talked to Mark Zandi, the chief economist of Moody's Analytics. And he's going one step further than prices are just going to, you know, not rise so fast. He thinks prices could actually fall, especially in the most juiced up markets.

MARK ZANDI: I expect prices to come down. If you told me two years from now, prices are 5, 10, 15% below where they are today, where they're peaking, I'd say that sounds about right to me.

MA: Mark has been following the housing market for a long time and has done a new analysis about home prices and whether they're overvalued, which is pretty much exactly the question we're trying to answer here. Are we in a housing bubble?

ARNOLD: And he says, look - interest rates have risen so fast in just the past three months that people cannot afford that, so prices will likely fall back a bit. And clearly, the number of homes that are getting sold each month - that's now dropping. So the market is deftly slowing down.

MA: But, you know, before you get too worried about that, Mark says, you got to keep in mind, prices have already gone up a ton. Like we said, Nashville - up 45% just during the pandemic. So if it falls even, like, 15%, that is still not a huge, huge pullback. And Mark says it's not just cities like Nashville. You could take places like Boise, Idaho - same thing.

ZANDI: Prices in Boise have gone completely parabolic. They've gone skyward. So all you're doing is retracing a little bit. So, you know, I think at the end of the day, that's, you know, manageable. But, you know, for the people who bought at the top - yeah, it's going to feel uncomfortable - right? - because you just lost 10, 20% of the home that you just put money down on.

MA: So if you're hearing all this and you feel like, well, that sounds like a housing bubble, right? Prices are going way up. They might fall. And in that sense, things are bubbly, or at least bubble-ish.

ARNOLD: Yeah, you could call them bubble-ish. But economists, they think about real bubbles when we talk about bubbles as being run-ups in prices where the prices become detached from the fundamental forces that drive them.

MA: Right - the fundamental forces like supply, demand, the cost of land or the cost of building a new home.

ARNOLD: In a real bubble, things just kind of go off the rails where those fundamentals go out the window, and there's nothing supporting those high prices. So it can end up being like a house of cards.

MA: And while Mark says prices have gotten pretty frothy, he says they're not in any kind of really dramatic or catastrophic bubble situation right now.

ZANDI: I don't expect a collapse in house prices like we did back in the crash for two fundamental reasons. One is supply. There is a shortage of homes that are available.

ARNOLD: And this actually goes back to the last housing crash, too, 'cause after that, a lot of homebuilders around the country just went out of business. I mean, they just shut down, and we did not build enough homes in America for a long, long time - like, a decade.

MA: And homebuilders are still trying to play catch up. But also, they have additional headwinds now, right? Like, a huge one are supply chain delays.

ARNOLD: And so they can't just, like, wave a magic wand and suddenly make 4 million homes appear, which is about what a lot of economists think we need. And on top of that, you know, builders can't find workers, and zoning rules get in the way. Lumber still costs twice what it normally does. And all that is making it really, really hard to build homes, especially, like, the smaller, more affordable ones that first-time homebuyers can actually buy.

MA: And when you bunch that all together, what you get is a supply of available homes, which is at a record low. And that is one reason why it's pretty unlikely that a true housing bubble is about to burst.

ZANDI: And then the other is, lending has been very good - plain vanilla, 30-year, 15-year fixed-rate loans.

MA: You know, huge difference from the late 2000s.

ARNOLD: Oh, yeah. I mean, a lot of the last housing crash was caused by really reckless lending that has since been outlawed. I mean, millions of people got foreclosed on because they were in these bizarre adjustable-rate loans where the payments went through the roof. And today, that is just not happening.

MA: As for what all this means for Chelsea Fitzgerald-Dole and her husband, Kevin - they have decided to leave Nashville, to leave their friends and the good food and the awesome music and move to a place where they can actually afford to buy a bigger place.

ARNOLD: And they have actually found one. They found a town in Kentucky where, it turns out, Kevin has family. And they say houses there are, like, half the price of Nashville. They can get a three-bedroom home for about $250,000.

FITZGERALD-DOLE: It's definitely more challenging for me, I think, 'cause I don't have any friends where we're moving to. And moving to northern Kentucky - that's going to be a new, different experience.

ARNOLD: On the upside, though, they are looking for a house with a well-insulated basement so Kevin's drum set won't be in the living room.

(SOUNDBITE OF DRUMS)

MA: This episode of THE INDICATOR was produced by Jamila Huxtable with engineering from James Willetts. It was fact-checked by Corey Bridges. Our senior producer is Viet Le. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

Holy moly, that is loud.

ARNOLD: You just got to get those noise-canceling headphones, man.

MA: (Laughter).

(SOUNDBITE OF DRUMS)

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