The housing market has been white hot for the past year, thanks to the stay at home and work from anywhere culture of the pandemic.
But there is increasing concern among consumers that housing is experiencing a price bubble – and that the bubble may be ready to burst.
Google reported last week that the search question “When is the housing market going to crash?” had spiked 2,450% in the past month. “Why is the market so hot?” searches had doubled in just a week.
And, in the most telling indication that the market may be in a bubble, “How much over asking price should I offer on a home 2021” jumped 350% in that same week.
There are various measures of home prices, but one of the most timely and watched is from CoreLogic, which showed prices up 10.4% in February year over year. That is the largest annual jump since 2006.
“We’ve got an acute shortage of supply on the market for sale at the same time that record low mortgage rates are driving the appetite to buy by millennials and Gen-Xers,” said Frank Nothaft, chief economist at CoreLogic.
There are about half as many homes actively listed for sale compared with this time a year ago, according to realtor.com. That has caused competition to ignite to the point where buyers are more likely to find themselves in bidding wars.
That Google question about overpaying doesn’t sit well with Nothaft.
“I have to admit I’m worried when I hear that. It does make me concerned,” he said. “That’s the mindset that comes in, because that means it’s an auction market.”
At the start of this month, 42% of homes were selling for more than their list price, according to real estate brokerage Redfin. This was 16 percentage points higher than the same period a year earlier.
“The housing market is more competitive than we’ve ever seen it, but a couple indicators are causing us to ask whether we’re nearing a peak in terms of how fast demand and prices can grow,” said Daryl Fairweather, Redfin’s chief economist. “Sellers’ asking prices may be starting to flatten in what so far appears to follow a typical seasonal pattern.”
Fairweather sees the decline in mortgage purchase applications as a sign that some people are dropping out of the market because there’s a lack of affordable homes for sale.
If these trends continue, she said, it could mean that we are “not in the midst of runaway home price speculation or a housing bubble.”
As mortgage rates rise, which they are slowly doing now, and buyers hit an affordability wall, Nothaft said he expects to see annual home price gains nationally cool to the 3% range. But all real estate is local.
“That does mean there will be some markets that are not going to have any price growth at all,” said Nothaft, adding, “I do think we’re likely to see some markets correct.”
Nearly 75% of the 100 largest U.S. housing markets saw annual home price growth of 10% or higher, according to Black Knight. Markets with the strongest price appreciation could be most at risk.
Many of those are in the west, where Californians have flocked during the recent exodus. Those include Boise City, Idaho, where prices are up 26% annually, according to Black Knight. Spokane, Washington (+20%); Ogden, Utah (+20%) and Phoenix, Arizona (+18%) follow.
Cities with the slowest home price appreciation are Chicago, Houston, New Orleans, Orlando and Pittsburgh, all with single-digit gains.
“Any hopes of 2021 bringing an influx of homes to the market and lessening pressure on prices appear to be dashed for now,” wrote Ben Graboske, president of data and analytics at Black Knight, noting the drop in new for-sale listings in January and February. “With higher interest rates and a continuing shortage of inventory, it will be important to keep a careful eye on both home prices and affordability metrics in the coming months.”
Homebuilders are slowly increasing production, and new government stimulus could add to that. As the economy opens and more Americans are vaccinated, cities could see a rebirth, taking some of the heat out of all that suburban competition. So will the housing market crash? Unlikely.
It will cool, no question, but unlike the great housing crash a decade ago, mortgage underwriting is very strict now, so most homeowners can afford the homes they’re currently in.
If prices chill or even drop slightly in some markets, it will not lead to a foreclosure crisis. Investors are quite heavy in the market as well, given the high demand for rentals, and that should serve as a backstop for major price declines.