The U.S. housing market is on fire. Double-digit appreciation is the rule. Giddy sellers are sifting through multiple offers. Frantic buyers are forced to pay more than asking prices — sometimes by $100,000 or more. The National Association of Realtors has reported that this spring that prices of existing homes soared a record 17 percent from March 2020 to March 2021 — a pace that eclipsed even the eye-popping appreciation of the last boom. Appreciation has cooled since then, but only a little — prices rose 13 percent from September 2020 to September 2021.
The last time the U.S. housing market looked this frothy was back in 2005 to 2007. And as we all learned the hard way, when home values crashed, the consequences were disastrous. When the real estate bubble burst, the global economy plunged into the deepest downturn since the Great Depression. Now that the housing market is booming again, buyers and homeowners are asking a familiar question: Is the housing market so hot that it’s about to crash?
As Bankrate reports, the foundations of this housing market look far more stable than those of 15 years ago. The supply of homes for sale has fallen to all-time lows, and borrowers are more creditworthy than ever, but that doesn’t stop people from worrying. The nightmarish memories of the last boom and bust remain fresh in the minds of homeowners, economists, lenders and Realtors. With home prices rising sharply in the past year, the latest boom is creating no shortage of concern.
“The one thing that I keep getting asked over and over is, ‘Is this a bubble?’” says Phil Shoemaker, president of originations at mortgage lender Home Point Financial. “If you look at what’s going on with home price appreciation, it feels bubble-ish. But if you look at the fundamentals behind it, it’s hard to say it is.”
So are we headed for a housing crash? Housing economists agree that no painful crash looms on the horizon. “We don’t have a bubble,” says Logan Mohtashami, lead analyst at HousingWire. “We just have unhealthy home price growth.” Duncan agrees that the sharp rise in home values, while unusual, isn’t a sign of a bubble. “It’s hard to find an argument that says it will fall part,” he says.
The National Association of Realtors predicts the housing market will cool rather than crash in 2022. The group forecasts home price appreciation of about 3 percent next year. “The housing sector’s success will continue, but I don’t expect next year’s performance to exceed this year’s,” says Lawrence Yun, chief economist at the National Association of Realtors. Yun notes that home price-to-income ratios have returned to eye-watering levels not seen since 2006. “Of course, the situation is much different,” he says. “But we should mindful of this condition.”
According to Bankrate, housing economists point to six compelling reasons that no crash is imminent.
- Inventories are at record lows: The National Association of Realtors says there was just a 2.4-month supply of homes for sale in September. In February, that figure fell as low as a tiny 2.0-month supply. The lack of inventory explains why buyers have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.
- Builders can’t build quickly enough to meet demand: Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand. While builders are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely. “The fundamental reason for the run-up in price is heightened demand and a lack of supply,” McBride says. “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”
- Mortgage rates remain near historic lows: After hitting all-time lows in January, mortgage rates have risen a bit — but not much. Bankrate’s survey of lenders shows the average rate on a 30-year loan stood at 3.22 percent this week. Low rates give home shoppers increased buying power. The Mortgage Bankers Association expects rates to rise to 4 percent by the end of 2022. That would crimp refinancing, but not homebuying. “We don’t think it’s going to move high enough to have an impact on purchase borrowers,” says Mike Fratantoni, the group’s chief economist.
- Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places. Millennials are a huge group and in their prime buying years. And Hispanics are a young, growing demographic keen on homeownership.
- Lending standards remain strict: In 2007, “liar loans,” when borrowers didn’t need to document income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting mortgages overwhelmingly have stellar credit. The typical credit score for mortgage borrowers in the third and fourth quarters stood at a record high 786, the Federal Reserve Bank of New York says. “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal,” McBride says. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”
- Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders haven’t been filing default notices during the pandemic, pushing foreclosures to record lows in 2020.
All of that adds up to this consensus: Yes, home prices are pushing the bounds of affordability. But no, this boom shouldn’t end in bust. “I’m not worried about a housing bubble,” says Ralph McLaughlin, chief economist at financial technology firm Haus.com. “The fundamentals are all there — low supply combined with growing demand for homeownership — to suggest the overheating we’re seeing in the housing market is not based on animal spirits but on an unfortunate and coincidental series of market forces over the past year.”
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