Is the Housing Market Going to Crash?

Is the Housing Market Going to Crash?


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The U.S. housing market remains hot, with median home prices up 10.3 percent from last year at this time, according Realtor.com data. With all the stories of unqualified all-cash offers on homes sight-unseen, you might wonder: Is this a bubble, and should we expect a crash? Well, not really—despite some signs of irrational buying behavior, increased housing demand is largely due to a shortage of homes that will likely persist for the rest of the year. Here’s what you need to know.

Are we in a bubble?

A bubble is when the price of an asset becomes untethered from what the asset is actually worth. However, a prolonged spike in prices doesn’t necessarily mean there’s no good reason for it, and when you look at the unusual pandemic-related circumstances—pent-up demand, low mortgage rates, abnormally low supply—you could argue that this isn’t a bubble.

“It’s a mixture of things,” says Jeff Ostrowski, a housing analyst at Bankrate. “We’ve got COVID pushing people to seek out more space, or different locations, a [glut] of millennials in their home-buying years, a job market that’s been robust for white collar workers, a stock market’s that been rewarding, and there’s certainly some crowd psychology where there’s some fear of missing out. It’s really a mixed bag, but there are still more buyers than sellers right now.”

And there are signs that the froth in the market is beginning to gradually die down. While prices are still climbing, July was the third month in a row in which the year-over-year gains have decreased (July was 10.3% compared to 12.7% in June 2021). According to the National Association of Realtors, unsold homes rose 3.3% from May to June, a sign that supply is very gradually gaining some ground on demand.

And as home prices climb, it looks like there are limits on what buyers are willing to pay, too, even with low interest rates.

“We have some signs of buyer fatigue,” Ostrowski says. “Certainly there are buyers that are worn out because they’ve been thwarted. We hear stories of homes going on the market and getting 40 offers in a weekend; that means there are 39 people who put in an offer and didn’t get the house. So yes, for a lot of buyers, that’s daunting, especially if you don’t have a lot of money for a down payment or you’re not a cash buyer.”

Where is the market heading?

The housing market isn’t easy to predict, but most experts don’t expect a crash. Unlike the 2007 housing crisis, which was caused by a bad lending climate, today’s overheated housing market is a result of supply and demand.

“Back in 2005 to 2007, the lenders were just throwing mortgages at anyone who wanted it—zero-down loans, negative amortization loans—all the crazy stuff. And that just does not exist today,” Ostrowski says. He adds that he doesn’t think a possible hike in mortgage rates will be a big factor in cooling down the current market, either, as rates during the 2007 frenzy were nearly double what people pay now.

Instead, many housing experts think the current seller’s market will persist into 2022, or at least until the housing supply catches up with demand. And while housing inventory is starting to ramp up, it remains exceptionally low overall. This is supported by a recent Urban Land Institute report that suggests that housing starts (new residential construction projects) will rise to their fastest rate since 2007 yet still fail to meet the pent-up demand.

“The consensus amongst housing economists is that we’ve got a long-term shortage of homes, and it’s going to be with us for a while,” Ostrowski says. “It might ease a bit, but the underlying factors are not going away.”



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