Qwick Takes: Is the housing market overheating?
This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about the state of the U.S. housing market and whether it may be approaching the point of overheating.
Check out some of the top commentary:
The housing market is absolutely red hot right now. Sellers are ecstatic and buyers are struggling to get their offers accepted. A few people are warning of a real estate crash like what happened in 2008 but I don’t think it’s correct to compare the market then to our current market. The 2008 crash was mostly caused by lending policies that allowed people to borrow more money than they should have without much of a down payment or cash reserves. The current scenario is caused by a combination several factors: people wanting to buy a house to have their own space due to the COVID pandemic, low interest rates, and the stimulus money being pumped into the economy. This has created an increase in demand, an increase in borrowing power, and an increase in dollars available in the economy. All of these things combined are the major reason for the very competitive market that we have today. Eventually it will slow down, but it is very unlikely that we will see a crash like in 2008.
“Overall, I don’t believe the housing market is overheating as much as it is going through growing pains as it’s trying to level out. There’s a balancing act going on with low rates, tight inventory and high demand–but it’s also further impacted by hurdles such as foreclosure/eviction moratoriums and inflated construction costs. Across the country, smaller markets are rebounding at different rates as well, so we see local governments working to address pain points with optimism, but whether they help or hurt the market remains to be seen.
We would say that housing is reflective of a constructive backdrop: low rates, millennials coming of age and forming households/buying houses, and a strong labor market. While home prices are close to all-time highs, and appreciating at levels faster than wage growth, the decline in mortgage rates has been more than enough to offset the gap and keep monthly payments low.
Housing remains affordable for the vast majority of first-time homebuyers. While rates are up over the past year, they are still well below previous peaks in 2018/2019, and are leading to better affordability that levels we saw pre-COVID.
In order to fear an overheating, affordability would need to decline to levels we saw in the ‘90s/’00s, or at the very least, pre-COVID.
“It’s no surprise that housing prices are rising here in the Sun Belt. People from both the East & West Coasts are flocking here during the pandemic, particularly Austin and Texas at large. The Sun Belt was already snatching up coastal residents before, but the pandemic really exacerbated the situation. These cities have great culture, great weather, plenty to do outdoors with more living space, but above all: they have jobs.
Right now, while job security is still a major concern for many amid the pandemic, the Sun Belt’s tech scene is exploding: Oracle has moved to Austin and Tesla is opening its largest gigafactory there, as well. Apple is spending $1 Billion on an employee campus in North Carolina. So, while job security is still in flux on the coasts, it’s quite comfortable in the Sun Belt. With all these movers flooding the market after leaving their tiny, expensive apartments for more space in a city with career opportunities, it’s no wonder housing prices are rising at an increased rate.”
The housing market is incredibly strong. The average U.S. home value has risen by more than 10% over the past year. That’s down to a combination of strong consumer demand, low inventory, and low mortgage rates. In addition, new homes are becoming scarce because of soaring construction costs.
As to what will happen next, nobody has a crystal ball. We know that before the pandemic, most experts thought housing prices would actually decline.
But now, high prices alone don’t necessarily mean the market is due for a correction. In fact, the current market isn’t showing many signs of weakening. Indeed, if mortgage rates stay low and demand picks up, it’s entirely possible home prices will continue to increase.
I don’t think the housing market is overheating yet. I think there’s still room for higher prices actually. Prospective buyers just witnessed how quickly rates went up. Now that rates are easing down slightly many buyers will see this as a possible quick opportunity to buy with more purchasing power before rates could rise once again. And the housing shortage still exists and doesn’t seem to be ending anytime soon. A potential buyer who plans on staying in their new house for many years will greatly benefit from the low interest rate. That is extra purchasing power that is lost when rates hike up.
The red-hot housing market and its double-digit pace of home price appreciation is not sustainable. But it is not a bubble. While current conditions – the large imbalance between supply and demand, low interest rates – are likely to continue for awhile, home prices are likely to plateau for a several years rather than show a sustained decline.
“The biggest difference, and the key difference, between now and the housing boom/bubble of 2002-2006 is that lending standards remain appropriately tight. If that changes, it will be a recipe for trouble once again.
Mihal Gartenberg, agent, Warburg Realty:
It’s reasonable to ask if the market is overheating and are we in a bubble similar to the one in the early 2000s that ultimately led to the housing market crash and recession of 2008. There are various ways in which this housing cycle is different. What we see happening here is a lack of supply and that is what is driving the pricing and housing market in most of the US. Furthermore, credit standards for lenders have tightened, which means that buyers are in better financial shape to handle their mortgages than what we saw in the early 2000s.
All marketplaces are driven by two factors: supply and demand. So long as supply is limited (low inventory) and there is demand, pricing will always increase in response. However, since it is difficult to buy in this market, it is reasonable to assume that sellers are reluctant to sell in order to become buyers in this same difficult market. That, to a degree, is what is keeping inventory low. It’s a vicious cycle that isn’t healthy for buyers or sellers.
The real estate market has been on fire for the past year and doesn’t show any signs of abating. Even when mortgage rates rose at the beginning of the year they were still at record lows and did not discourage buyers. We have changed the way we live and where we want to live over the past 13 months and today’s hot market is a reflection of the American “reset on real estate.
We are seeing an extremely strong market heading into the summer. The first quarter contracts signed was up over 35% from Q1 2020 and we have had over 61% more closings during the same period. There was talk pre pandemic about an over supply of apartments in New York City and we have seen that the pause in construction and development has enabled buyers to start to close that supply gap.
We think this strong buying activity will continue throughout the summer and into the fall. The economy seems to be getting stronger and the fears of the pandemic have subsided, so that will tend to push buyers that were on the fence into the market. The only real hesitation was related to the virus concerns and the stability of the economy, but if that starts to shift, then the market will only get hotter.
Remote working fueled a desire for homeownership and a mass exodus from cities to the hottest housing markets right now – suburban and exurban areas. I think the historically low mortgage rates are behind us, and as the economy starts to recover, rates will continue to steadily increase. We’re in a seller’s market, so eager buyers are coming up with creative ways to stand apart from other interested buyers. These include releasing earnest money early as a non-refundable deposit, making cash offers, offering above asking price, covering seller closing costs and expediting closing timelines.
In 2021, we are not in danger of the market overheating if mortgage rates and inventory levels stay low. The other major variable is the job market. The government and its programs have assisted many businesses in remaining a float. However, if this support ends before companies can fully rebound from the pandemic, this may cause even more companies to reduce their employee force or even shut their doors. This may force homeowners to sell their homes to gain access to their home’s equity. If this happens, more homes will come to market and drive home values down. For the foreseeable future, I see the market staying strong and potentially start to neutralize in 2022.
The housing market today is running quite hot, and at the current rate, it is, quite frankly, unsustainable. However, this doesn’t mean we’re in a speculative bubble at risk of bursting. We’ve had a series of unfortunate and coincidental events that have pushed prices upwards. Namely, an inventory death-spiral caused by the pandemic coupled with a large cohort of homeownership-thirsty millennials being drawn to the well by historically low mortgage rates. This has led to a market imbalance of low supply and growing demand that has resulted in an atmospheric rate of price growth not seen in over a decade.
I have been getting asked a lot recently about whether the housing market is “overvalued.” My simple answer is no. As a student of economics, my view is that absent any unusual market influencers (like the credit bubble that precipitated the 2007-2011 housing downturn) today’s housing prices simply represent a true intersection of the supply and demand curves. While we know what replacement costs are as a barometer, there is no underlying fundamental formula to determine what the intrinsic value of a home is besides what buyers and sellers are willing to pay in the open market.