Is there a Housing Bubble?

Dated: June 3 2021

Views: 393

With home prices at a new record high and homes flying off the market in hours in some cases, it’s no wonder that Google searches for “when is the housing market going to crash” have spiked dramatically in recent weeks. After all, the mania seems reminiscent of the run-up to the housing bubble in the mid-2000s—and we’ve all been told that what goes up must eventually come down.

However, housing is likely to keep defying common sense. Experts say there’s no reason to prepare for a crash landing like we experienced in 2008 and 2009. This time around, the reason for the out-of-control prices is simply that there are many more buyers than there are properties for sale. Another simple rule: Prices rise when there is more demand than supply. Crazy, it seems, is the new normal.

“Today’s prices feel unsustainable, today’s frenzy feels unsustainable. But that doesn’t mean there’s going to be a crash. That’s bad news for a lot of shoppers who are hoping for prices to come down.”

Nationally, median home list prices shot up 17.2% year over year in April, to hit a new record high of $375,000, according to® data. Meanwhile, incomes haven’t risen anywhere near as much.

Still, “There are a lot of people sitting on the sidelines desperate to buy a home,” says Wolf. “If the market stabilizes, there are a lot of [buyers] who are going to come out of the woodwork to soften the blow.”

What’s more likely to happen is that, over the next year or two, prices will continue to rise, but at a much slower pace. Bidding wars will taper off, and the astronomical offers over asking price will eventually come down.

But that doesn’t mean prices will return to their pre-pandemic levels. List prices are expected to continue rising to meet sale prices, but the annual increases won’t be nearly as brutal.

The only way prices would drop by any significant amount would be if mortgage rates shot up substantially and a lot of homes flooded the market. Record-low rates have allowed buyers to purchase more expensive homes while keeping their monthly payments within their budgets. As rates rise, buyers won’t be able to afford the higher prices. Plus, an increase in inventory would give buyers more choices, meaning there would be less frenzied competition.

Why isn’t the housing market on the verge of crashing?

The fast-rising prices and market mania may feel reminiscent of the days leading up to the last housing crash. But the culprits behind the last meltdown aren’t as present this time around.

For starters, today there are far more buyers than homes for sale. That’s a sharp reversal from the late 2000s, when overbuilding yielded far more properties than there were buyers. Now, there isn’t enough new construction to meet demand and investors aren’t going wild driving up prices.

Most importantly, bad mortgages—the key factor in the financial crisis—have largely disappeared from the market. New regulation in the wake of the last calamity has ensured that only the most qualified borrowers can get mortgages and the riskiest loans, such as subprime mortgages, are largely no longer available to the masses.

Today’s buyers may be paying top dollar, but they’ve been vetted to ensure they can afford their mortgages.

Could some folks overpay for homes that will lose value?

Buying a house is often the biggest investment that most folks will ever make—so they want to make sure it will increase in value. But many folks are wondering if the value of homes purchased today at record-high prices will fall once the COVID-19 pandemic is over and the market returns to some semblance of sanity.

Will they be able to sell them for at least as much as they paid? Or will they wind up owing more on their loans than their homes are worth?

The experts say most buyers shouldn’t worry. The lack of supply combined with the high demand should keep home prices stable—for the most part.

Desirable suburbs with lots of amenities and short commutes to the bigger cities are expected to continue increasing in value, say experts. Popular vacation markets and growing cities that are attracting good jobs are also expected to do well in coming years.

The markets that could be the most vulnerable are some of the smaller cities and exurbs without a lot of high-paying jobs. These experienced a big run-up in a short amount of time as folks suddenly wanted more space and land, but as more folks go back to the office and there are fewer out-of-town buyers with big bucks, prices in these areas are likely to revert to what local incomes can support. However, the adjustment is not likely to be drastic.

Contact an O'Brien agent today to find out if now is the best time to buy and sell. 

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