Is a Housing Bust Ahead? Look at Short-Term Sales

With the recent run-up in real-estate prices amid the housing shortage and now rising mortgage rates, many people are concerned that a housing bubble—similar to the one 15 years ago that set off the Great Recession—is about to burst in the United States. As a sign of what’s to come, some point to the level of speculation in the market. A recent Atlantic article highlighted activity by house flippers, “aspiring Airbnb tycoons,” and other investors in the market for single-family homes.

Research suggests that the interest in this activity could be well placed. Northwestern’s Anthony A. DeFusco and Charles G. Nathanson and Chicago Booth’s Eric Zwick find that speculation was one factor that drove the dramatic 2000–05 boom and subsequent collapse. Short-term buyers such as house flippers were particularly influential in the market.

Like many other economists, Zwick sees the US housing market slowing and says it has entered a phase called the quiet—the lull following a boom that’s just before a potential bust. Other research (including by House of Debt authors Booth’s Amir Sufi and Princeton’s Atif Mian) finds that credit played a large role in the prior bust, which suggests that credit levels are crucial to assess and watch now. DeFusco, Nathanson, and Zwick argue that speculation, possibly fueled by credit access, is another important force to monitor.

Focusing on which buyers are most active during each phase of the cycle can shed light on the underlying mechanisms causing prices to rise and fall, according to the research. Similarly, looking at those markets that attract more speculative buyers can be a predictor of the degree of downturn that might follow. That has relevance to today’s market, Zwick says. In comparison to the prior cycle, “what’s different about this one is that [transaction] volume didn’t go up that much. I’m not sure we have the same speculative-entry phenomenon driving price growth.”