Opinion: The demand for housing is on the verge of weakening. here’s why

By Jessica E. Woolford Last updated Jun 29, 2021

Although it is overvalued, there is no indication that the housing market is in a bubble. (A bubble develops when there is speculation or when buyers buy homes for the sole purpose of selling quickly for a profit, which is not the case today.) But stress lines start to creep in. appear and the housing market is about to calm down. .

The increase in house prices is staggering. At national scale, house prices are up double digits over the past year, following a decade of solid price gains since the housing market bottomed out following the financial crisis. Indeed, the median price of existing homes – half of homes sold more and the other half cheaper – is approaching $ 350,000, almost double what it was a decade ago.

Think about the return you would have earned if you had had the courage to buy the house at the median market price after the financial crisis, say with a typical 20% down payment. This is about a 560% yield.

There is simply not enough new housing at the moment to meet demand, and the vacancy rate for homes for sale has never been so low. Home builders have been slow to build more homes, especially at lower prices, given restrictive zoning since the financial crisis, and much more labor and cost of materials recently.

Rising house prices are fueled by the collapse of fixed mortgage rates to record troughs during the pandemic. They have increased a bit in recent months, but they remain below 3%, which makes them extraordinarily attractive. Since most homebuyers buy as many homes as their mortgage payment allows, falling mortgage rates quickly increase demand and prices for homes, especially when there is a home shortage.

The phenomenon of work from anywhere fueled by the pandemic has further inflated house prices. This led apartment housekeeping in the largest cities of the country to move to houses in the suburbs, suburbs and small towns. New Yorkers and Californians, who are used to oversizing house prices, viewed the much lower prices in small communities as a bargain, even though they paid significantly more than any previous buyer.

The federal government’s considerable efforts to support the single-family mortgage market during the pandemic also bolstered the housing market and house prices. the moratorium on foreclosures and abstention on government guaranteed mortgage and student loan repayment have outpaced sales of distressed homes, which are typically sold at significant discounts, and therefore weigh on home prices.

Constraint lines start to appear

But stress lines are starting to appear in the housing market. Home prices have risen so far so quickly that they have become overvalued. At national scale, house prices appear overvalued by about 10-15% when comparing price-to-income or price-to-rent ratios with their long-term historical averages, according to my analysis. Some markets, mainly in the South and West, are seriously overvalued – by more than 20%.

Overvalued real estate markets are vulnerable to a significant price correction as mortgage rates eventually rise. And they will. the Federal Reserve believes that the economy is set to return to full health quickly and signals that it will soon begin to normalize interest rates. Additionally, working from anywhere, while probably a fundamental change in the way we live and work, is also certain to partially relax when companies ask their employees to come back to the office. . And the foreclosure moratorium and mortgage and student loan forbearances will expire in the coming weeks.

Demand for housing will therefore weaken. House prices will adjust. Not that there will be widespread declines in house prices; it still seems like a small threat. This would require a significant increase in defaults and distressed sales, which is unlikely given the improving labor market and generally tight mortgage underwriting standards since the financial crisis.

In addition, the real estate market is not in a bubble. Unlike the real estate bubble we experienced before the financial crisis, house flips, defined as an arm’s length sale within one year of the previous sale, remain low, according to my analysis. And much of the turnaround that’s happening is due to investors buying older homes, especially in older cities in the Northeast and Midwest, renovating them, and then selling them quickly.

But the house price gains will certainly subside, a lot. There may even be modest price drops in the hottest high-end sectors of the housing market, in second homes and vacation homes, and in small and medium-sized towns that have seen the greatest influx of work from anywhere. households. And while owning is generally better financially than renting, homeowners shouldn’t expect the outsized returns they’ve enjoyed over the past decade to be repeated in the next. .

Opinion: The demand for housing is on the verge of weakening. here’s why

Constraint lines start to appear

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