What a housing bubble would mean for home buyers
By Anna Bahney, CNN Business
As if home prices in the United States weren’t high enough, they’re getting even more expensive.
The stubbornly low number of homes for sale continues to drive up prices and mortgage rates are rising faster than they have in decades. This put pressure on home buyers and the real estate market.
Indeed, some researchers and economists believe that the market has started to show signs of a housing bubble.
“Our evidence points to abnormal behavior in the US housing market for the first time since the boom of the early 2000s,” researchers from the Federal Reserve Bank of Dallas wrote in a blog post last week. “The grounds for concern are clear in some economic indicators … which show signs that property prices in 2021 appear increasingly out of step with fundamentals.”
So what does a potential bubble mean for home buyers and sellers?
Early buyers will be priced out
The continued lack of supply in the current market, combined with growing demand, is driving prices up and pushing more potential buyers away.
“All the metrics related to income and housing affordability seem out of sync, and the strange movement in the data is actually caused by the lack of supply,” said Lawrence Yun, chief economist at the National Association of Realtors. “We need to ramp up inventory.”
The typical home saw a 40% increase in monthly payments a year ago, Yun said, with house prices up about 20% and another 20% in higher mortgage rates.
“People’s incomes have not increased to the same degree that prices have increased and the cost of property has increased dramatically,” he said.
It’s not sustainable, Yun said, and the result is an increasingly inequitable housing market in which fewer people can own property and first-time buyer prices are entirely slashed.
“Prices that rise that much are not healthy,” he said. “People associate the American Dream with working hard and owning a home and it seems increasingly out of reach or unreachable.”
Rising interest rates should slow demand
Housing experts note that the housing market’s exuberance has also been fueled by mortgage rates that have been too low for too long due to the Federal Reserve Bank’s monetary policy.
As rates rise, they say, demand will fall.
“Rising interest rates from 3% to nearly 5% in four months, which has helped fend off some of the competition,” said Mike Maher, co-founder and CEO of Houwzer, a real estate brokerage firm. .
Still, he added, “it will be very difficult for this bubble to burst anytime soon as demand outstrips supply and even as rates rise, silver continues to be cheap by historical standards. “.
A potential benefit of higher mortgage rates, he said, is that the inventory situation could improve.
“What I hope will happen over the next 12 to 24 months is that rising interest rates will push some buyers away to flatten home price appreciation a bit. Then, potentially, homeowners would move their homes on the market,” he said.
Investors can start withdrawing
A market bubble can occur when there is a lot of speculation and buyers come in with the intention of selling for more later. Some housing experts point to growing investor participation in the market as a sign that a bubble is brewing.
“I’m moderately concerned about a possibility of a bubble,” said Arpit Gupta, assistant professor of finance at New York University’s Stern School of Business. “My concern in housing is that house flipping is on the rise.”
The number of homes flipped by investors in 2021 was up 26% from 2020 and was at its highest level since 2006, according to ATTOM, a real estate data company.
These investors include “mom and pop” pinball machines, but also large real estate companies in the buyer’s business and, to a lesser extent, companies in the single-family rental sector that are betting on rising rents.
“This fundamental rise in rents is supporting property prices,” Gupta said. who added that the lion’s share of home sales still goes to people who use the home as a place to live.
“Investors are betting on a future of increased inequality where a larger share of Americans are renters,” said Daryl Fairweather, chief economist at Redfin. “They are contributing to this problem by competing with first-time home buyers and continuing to reduce supply in this entry price range.”
While investors aren’t necessarily the source of the problem, she said, they are taking advantage of more than a decade of underbuilding in the United States, which has created an environment of low supply and strong demand.
But the attractiveness of these investments could diminish.
While the number of flipped homes increased last year, gross profit margins on home flips in 2021 fell to their lowest level in more than a decade, according to ATTOM.
“There are a lot of things that are troubling signs that suggest house prices are outpacing people’s ability to live in those houses and afford them,” said Christopher Mayer, a real estate professor at Columbia Business. School. “At some point, investors have to sell to someone. They can sell to other investors — it’s a bubble. But… ultimately, homes have to be affordable for the people who live there.
Prices are not expected to drop… yet
Don’t hold your breath for house prices to return to “normal”. Prices aren’t expected to drop any time soon, according to Fairweather.
“It’s hard to imagine prices going down,” she said. “But I think we’re nearing the end of the period where homes are $100,000 above asking price.”
She was quick to warn that it was not like the last housing crisis, where many landlords had mortgages they could not afford. “We learned a lot last time and we don’t have the same risks,” Fairweather said.
New lending laws introduced after the housing crisis were designed to better regulate the financial sector and protect consumers. Most homeowners now have fixed rate mortgages, and there aren’t as many lump sum payments to worry about, she said. In addition, lending standards are much stricter.
“The current owners had to show they had a lot of assets to get the mortgage and they had a lot of equity,” Fairweather said. “There hasn’t been a lot of predatory lending like there used to be. In fact, there is a lack of access to credit for those with less than perfect credit scores.
Critically, any change in the housing market is not likely to have a significant impact on the broader economy as it did last time around, Mayer said. “It shouldn’t show up in the financial system, but it will show up elsewhere.”
While prices may not be falling anytime soon, they probably will eventually, he said.
“I don’t think the risk is like what we saw from 2008 to 2010 or prices are going to crash,” Mayer said. “But it’s perfectly reasonable that they could go up next year and then go down. I could see prices drop 5% to 10% in three to five years. And you might end up selling for a little less than you bought it for.
That means those looking to buy now should focus on a home they can reasonably afford and stay there for a while, Fairweather said.
Ultimately, buyers can tame that feeling of “fear of missing out,” Fairweather said, by buying a home they can stay in and grow in for the next five years or more.
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