Homebuyers have faced a difficult choice during the pandemic: swallowing the rapid price increases and give up typical steps like home inspections, or risk being left out of the real estate market. These dynamics have led some observers to question whether the U.S. is repeating the real estate bubble of the early 2000s, which caused a painful real estate crash in 2006 and the Great Recession the following year.
The answer, the Dallas Federal Reserve Bank warns, is that the real estate market is showing “signs of a real estate bubble in the United States.”
This can be disturbing for millions of potential home buyers who are facing a myriad of financial pressure points. On the one hand, mortgage rates they are rising rapidly, reaching an average of 4.67% for a 30-year fixed-term loan for the week ended March 31, the highest since 2018, according to Freddie Mac. And the national average home price has risen to a record $ 405,000, Realtor.com said on March 31.
Home buying increased during the pandemic due to a confluence of trends. For starters, millennials now represent the largest generation in the United States and have moved into their early years of home buying. And the pandemic forced millions of people to work from home, causing some to move from cities or look for larger homes to cope with the reality of remote work. The typical home price has risen nearly 27% in the past two years, Realtor.com said.
Certainly, a rapid rise in home values does not necessarily mean a bubble, Dallas Fed economists noted.
“But real house prices may diverge from market fundamentals when there is a widespread belief that the current sharp price increases will continue,” they noted. “If many buyers share this belief, buying out of a ‘fear of getting lost’ can drive up prices and raise expectations of strong home price gains.”
In the meantime, more homebuyers are opting for adjustable rate mortgages, or ARMs, as these loans offer a lower initial rate for a few years, but then adjust annually at higher rates. The demand for ARM has increased by 26% over the previous year, according to real estate company Inman. The current rate for an ARM 5/1 (with the initial rate set for five years) is 3.5%.
To examine whether the current dynamics could reflect a bubble, Dallas Fed economists analyzed three different market metrics. His conclusion: there are indications of a “market turning point”.
“Exuberance indicator”
First, economists analyzed a statistical model that tracks “exuberance,” or when prices rise at an exponential rate that cannot be justified by economic fundamentals. When its exuberance measure reaches the 95% threshold, this indicates a 95% confidence that the market is experiencing “abnormal explosive behavior,” they noted.
The current exuberance measure: 115%.
Economists then looked at another valuation measure: comparing house prices with the sum of discounted future rents. It’s a concept similar to how investors determine the value of a stock by looking at discounted future dividends, economists said.
This, too, is showing an exuberance that is “comparable to the start of the last real estate boom,” they said.
Third, analysts examined the relationship between house prices and disposable income, another measure of housing affordability. This has not increased to the level of exuberance, but economists noted that household disposable income was boosted during the pandemic by stimulus controls, as well as by a decline in household spending due to blockages. , transient factors, in other words.
Danielle Hale, chief economist at Realtor.com, said that while the current rate of growth in house prices was unsustainable, it is difficult to predict when price increases will slow.
“Double-digit price increases and rent increases can’t last forever,” he said.
Hale said the rise in mortgage rates, which makes housing less affordable, should slow the pace of rising prices a bit. “When mortgage rates went down, that helped cushion the high costs of housing, because people had smaller monthly payments. Now rates are moving in the opposite direction and monthly costs are rising. That means prices they will not be able to keep up with the double – digit growth rate, “he said.
The FOMO wave raises concerns
There are some differences between 2022 and the real estate peak of 2006 that collapsed into a global financial crisis that took years to heal, economists said.
On the one hand, household finances are in better shape than in 2006, and the easy-to-secure loan rate that drove the housing boom is a thing of the past. At the time, some banks distributed so-called “liar loans” or mortgages that required little or no income documentation. Today, banks require buyers to verify their income to qualify for a loan.
But there is something else that economists have pointed out as worrying: “A wave of exuberance from fear of getting lost that involves new investors and more aggressive speculation among existing investors.”
The consequences of a housing correction from the current housing boom would not be similar to the 2007-2009 financial crisis, they said. But for some recent homeowners, a fix could still be painful.
CBS News’s Irina Ivanova contributed to the report.
- In:
- Real state
Add Comment