Is a Housing Bubble About to Burst?

Folks have been asking whether they should be concerned about a housing bubble bursting like it did in 2008. Rest assured–there is no housing bubble. Market indicators are very different than they were in 2008. Let me take you through it step by step.

Recent interest rate hikes have caused housing prices to drop a little; however, the overall demand for housing remains strong, primarily because there are not enough homes for all the people who want to buy them. So, while prices will likely continue to soften a bit in response to interest rate hikes, I expect the decline in housing values won’t be precipitous or severe.

In the 15 years since the last housing bubble, housing inventory has fallen woefully short in California—and the Ukiah Valley is no exception. In Ukiah, we have a shortage of housing in all price ranges. The only new housing to speak of has been subsidized apartments.

You might be wondering: if there’s so much demand, why don’t we have more market-rate housing? The answer, in large part, is government regulation, which has increased dramatically in recent decades.

Contractors are not allowed to build the same houses they built 20 years ago. Today’s homes must have sprinklers, use solar energy, and be fire hardened. Subdivisions cannot be built without environmental impact reports (EIRs) and remediation from any findings. The cost of building permits keeps climbing, and new costs like school impact fees and fire impact fees have also increased.

To be clear, I support building safe homes in an environmentally responsible way. I also support education and firefighting. However, I do not believe the massive increase in regulation is warranted. It is expensive in both time and money, and I am not convinced it has improved safety or environmental care by all that much. It has, however, funded a lot of work on the part of bureaucrats.

Although it is easy to quantify the cost of fees, sometimes the cost of delays is even more expensive. Let’s say you want to build a million-dollar subdivision. Simply to maintain the property, it costs the developer about 10 percent of the value of the land per year (in this case, that’s $100,000). Every year the project is delayed by red tape (EIR, zoning, etc.), the developer is losing another $100,000—not to mention the cost of the EIR, which can run in the hundreds of thousands. And, there is no guarantee the developer will recoup any of that money.

As the months and years go by, the housing market that existed when the original plan was created may no longer exist. Imagine you’re a developer who bought property for a subdivision when interest rates were 3 percent and all your profit estimates were based on that number—then over the course of the two-year delay, interest rates more than double to 6.5 percent.

For the same size home loan, a change from 3 percent to 6.5 percent would increase in monthly payment by about 50 percent–a payment of $1700 per month would jump to about $2500. Homebuyers don’t much care about the price of the house or interest rate. They care about the monthly payment.

To get the monthly payment down to the figure at the planning stages of the subdivision, you’d have to reduce sales price of each house in the subdivision by a third. That price reduction swallows any profit the developer might have made.

Meeting the housing demand is impossible with the current level of governmental red tape.

The only upside to a housing shortage is that it all but guarantees that we will not be facing a housing bubble in the near future. As rates go up, prices will adjust downward. As rates go down, prices will adjust upward. But I see no indicators suggesting a calamitous drop in prices.

My advice is not to worry too much about the market. If you find a home that meets your needs, you are comfortable with the cost of ownership, and you plan to stay put for a reasonable length of time, you should be good.

If you have questions about property management or real estate, please contact me at or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 45 years.

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