Nearly 15 years after a housing bubble sparked the worst U.S. financial crisis since the Great Depression, some observers are raising concerns that the industry may be in another bubble.
Home prices are soaring despite high mortgage rates, which in theory should suppress demand and push prices down.
Meanwhile, the percentage of U.S. homeowners experiencing severe financial strain rose slightly earlier this year compared to the final months of 2023, real estate data firm ATTOM reported this week. revealed in the report.
Despite these trends, experts who spoke to ABC News largely dismissed concerns about a housing bubble.
They said that while frothy prices and the strain placed on prospective homebuyers were cause for concern, the soaring prices were due to old-fashioned imbalances in supply and demand, not the frenzied speculation typical of bubbles.
Lawrence Yun, chief economist at the National Association of Realtors, told ABC News: “The price increase is very significant, but it’s not caused by any extraordinary factors.” “It’s just supply and demand. The usual reasons.”
Two years ago, the Fed began a series of aggressive interest rate hikes to rein in inflation. Such policies typically raise mortgage rates and cause home prices to fall as homebuyers shrink from rising borrowing costs. In this case, mortgage rates skyrocketed, but so did prices.
According to data released in March by the National Association of Realtors, prices for existing homes have increased year-over-year for nine consecutive months. Going back further, the median price of existing homes has increased nearly 40% over the past four years, according to NAR data.
“This is a strange market that seems abnormal,” Mark Norman, associate dean of New York University’s College of Professional Studies and the Shack Institute of Real Estate, told ABC News. “I can certainly see why some people are wondering if it’s a bubble.”
But experts told ABC News that the cause of the soaring prices is a simple case of too much money chasing too few homes.
Norman said that during the COVID-19 pandemic, a shortage of materials and labor led to higher input costs and slowed home construction. Just as the supply bottleneck began to ease, the Fed raised interest rates, making it more expensive for developers to borrow the money they needed to get their projects off the ground.
The slowdown in housing construction is contributing to the housing shortage. Real estate and investment firm Hines said in a report last month that housing supply is 3.2 million units short of what is needed to meet demand.
“There’s not enough housing being built in this country, and there’s still a lot of demand,” Christopher Mayer, a real estate professor at Columbia University Business School, told ABC News. “Interest rates are making construction more expensive and making housing more expensive.”
Experts say the current housing shortage stands in contrast to the housing bubble that sparked the Great Recession.
At the time, rapidly rising prices led to a surge in housing construction, creating an oversupply of housing. The abundance of housing has led buyers to purchase a property or properties to value them as assets, rather than as a place to live. When no new buyers were found and the music stopped, prices plummeted.
Ken Johnson, a real estate economist at Florida Atlantic University, said that while prices are unusually high in the current market, there is a limit to how low prices can fall due to the lack of housing, and a lack of choice for buyers is causing prices to drop. will continue to rise, he said. he told ABC News.
“We don’t see a dramatic collapse,” Johnson said, adding that he expected house prices to plateau or fall slightly in the coming months as consumers test the limits of their budgets. “On a scale of 1 to 10, the last bubble was a 9, this time it’s a 2 or 3.”
Still, Mr Johnson said a potential rate cut could further heat up the housing market, pushing prices higher and further threatening the stability of the housing sector.
However, Yun raised the possibility that the recession could force layoffs, hurt homeowners’ ability to repay their mortgages, and flood the market with homes. Even in such a situation, “the decline in housing prices will be fairly gradual,” he said.
Even without a full-blown bubble, the market could take advantage of some degree of deflation, Norman said.
“For me, the bigger issue than the bubble is simply the lack of affordability,” he added. “Maybe the bubble won’t pop, but the air will escape from the balloon.”
