Redfin Uses A Curious Definition of "Bubble"


First of all, I know there’s cool Q1 news out there and coming soon from companies I’m keeping track of. But I’m at the T3 Summit today, so look for the Q1 updates next week.

In the meantime, I thought I would take notice of something… a bit odd.

Bubblicious… Or Not

Read this story on Inman, and then this followup also on Inman. The first story says there’s a strong whiff of the ye olde bubble going on in real estate today. The second story then denies that there is anything even remotely like a bubble:

But an analysis released today by Seattle-based brokerage Redfin highlighted key differences between today’s market and the last housing bubble, concluding that current market dynamics make it unlikely that home prices are overheating.

Rising home prices and high demand are making the market feel like a bubble, Redfin said. But in contrast to conditions during the housing boom, credit standards are rigid and a disproportionate share of home sales are all-cash purchases, Redfin said. The company also said that, unlike with the bubble, price gains are not exceeding income gains and listings are in short supply.

So I go to the original blogpost by Redfin. Their argument is something like this:

In order for there to be a bubble, there must be

  1. Rapidly rising home prices
  2. Disconnect from home prices to income
  3. Lots of listings and sales
  4. Proliferation of sketchy financing

So, since we don’t see #2, #3, and #4, there is no bubble.

Um, what?

Is There Some Need for This Alternative Definition of “Bubble”?

Wikipedia gives us this definition of “economic bubble”:

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. It could also be described as a trade in products or assets with inflated values.

There is zero mention of financing, because sources of financing doesn’t matter one bit as to whether there is an asset bubble happening or not.

For example, there is zero evidence to suggest that sketchy financing was involved in the tulip mania of 1637. Or in any of the other bubbles throughout history. People can pay cash for a tulip bulb, and lose everything when prices collapse.

I’m also unclear why the number of listings and sales is relevant to defining a bubble. As Redfin says:

To put it another way, during the frenzy in 2005, inventory felt tight because many buyers were acting crazy, but today inventory is actually tight. Tight inventory naturally leads to price increases.

Maybe I’m missing something here, but… I’m not understanding how inventory “felt tight” in 2005. Buyers were in multiple bid situations, and losing out. I suppose we can say those buyers weren’t actually dealing with low inventory; it just felt like it. If you’re the buyer, how is it any consolation that when they lost out on the house today, it’s okay, because inventory is actually low. It’s more than a feeling (cue Boston).

Either way, asset bubbles can form with few sales as long as the price of the item goes above the “intrinsic value” of the item in question. Not sure what inventory levels or sales levels have to do with bubbles.

I Ain’t Sayin’ There’s A Bubble

Now, I don’t know that there’s a bubble in real estate. Maybe the price-to-income means that we’re actually just in a healthy secular market. Maybe this is the housing market finally turning around.

But whether there is or is not a bubble depends almost entirely on the price vs. “intrinsic value”. In terms of housing, I figure the only question is the monthly cost of paying the mortgage vs. paying the rent. Where the buy vs. rent is lower, I think I could argue that there is no bubble, since you have to live somewhere and the “intrinsic value” has to do with prevailing rents. Price-to-income isn’t even the right metric, IMHO, since income doesn’t dictate intrinsic value: rent does.

But where buy vs. rent is the other way, then yeah, there’s a bit of a bubblicious action going on. If it’s minor, maybe there’s no bubble, since rents will rise to catch up. But if it’s way out of whack… yeah, there be bubbles forming.

I know, this isn’t some big long heavy-duty think piece. It’s just a minor little observation. But like I said, I just found it curious that Redfin and Inman wanted to use this odd definition of “bubble” to suggest there is no bubble in real estate.

Maybe that ought to worry me more than anything else.


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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