Fed economists warn of ‘brewing a housing bubble in the United States’ as home values continue to soar
As home price appreciation continues to rise to unanticipated levels, some potential buyers may worry about an impending real estate crash. Worryingly, new research from the Federal Reserve Bank of Dallas points to the first signs of a ‘mature US housing bubble’.
“Our evidence points to abnormal behavior in the US housing market for the first time since the boom of the early 2000s,” Fed economists said.
The report’s authors point to a number of economic indicators that suggest unsustainable growth in house prices. In particular, the price-to-rent ratio and the price-to-income ratio are “increasingly out of step” with market fundamentals.
Dallas Fed economists blame the widespread belief among consumers that rapid price growth will continue, prompting some buyers to buy a home now in hopes that home values will rise further. This is a “self-fulfilling mechanism” that can push prices above actual home values.
This is not to say that house price appreciation is entirely overvalued – higher construction costs, supply chain disruptions, relatively low borrowing costs and rising disposable incomes have supported actual price gains. And thankfully, economists don’t expect a housing correction to be as big as the housing crash of 2008 that led to a global financial crisis.
“Among other things, household balance sheets appear to be in better shape and excessive borrowing does not appear to be fueling the housing market boom,” the authors said.
Keep reading to learn more about the housing market forecast from economists, so you can make an informed home buying decision. If you’re considering buying a home or refinancing your current mortgage, you can compare home purchase and mortgage refinance rates on Credible for free without affecting your credit score.
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Economist: Housing market heading for ‘substantial slowdown’
The Fed’s concerns are echoed by Ian Shepherdson, chief economist at Pantheon Macroeconomics. He expects existing home sales to fall about 25% by the end of the summer due to lower demand for mortgages and rising interest rates. The average 30-year mortgage rate peaked at 4.67% on March 31, according to data from Freddie Mac, the highest rates since 2018.
“The housing market is in the early stages of a substantial decline in activity, which will trigger a sharp decline in the rate of house price increases, perhaps starting as early as spring,” Shepherdson said in a recent report.
Shepherdson estimates that monthly mortgage payments for median-priced homes have jumped $400 since September, which will continue to put pressure on new buyers as mortgage rates continue to rise. This is in line with research from the Mortgage Bankers Association (MBA), which found that new mortgage payments rose 26% annually in February.
“That’s a huge increase, even for households sitting on savings built up during the pandemic – a one-time increase in savings cannot fund an increase in mortgage payments for the next 30 years – and it will drive down the ask,” he said.
While this may be disheartening news for buyers, it’s not necessarily bad for homeowners who are sitting on mountains of untapped equity. Appreciating home prices may give some consumers the opportunity to make home improvements or pay off higher-interest debt through a mortgage refinance with drawdown. You can get in touch with a loan expert at Credible to learn more about mortgage refinancing.
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Some real estate experts see signs of a ‘healthy market’
Not all economists agree that high house value appreciation signals impending doom for the housing market. Mike Hardy, mortgage consultant and managing partner of Churchill Mortgage, said the current housing market is “the complete opposite” of a housing bubble.
“The current housing industry is in a period of continued growth and the low inventory we are experiencing signals a healthy market,” Hardy said. “The only ones putting themselves in danger are those sitting on the sidelines and missing.”
Additionally, some experts predict that mortgage interest rates will continue to rise, putting less strain on the market. Melissa Cohn, a New York-based executive mortgage banker, said while real estate professionals and buyers have been “stunned” by the sudden increases in mortgage rates in recent weeks, she expects rates exceed 5% by the end of 2022.
“The sentiment in the market is that bond yields are going to keep rising and therefore mortgage rates are going to keep rising,” Cohn said.
Rising mortgage rates may dampen — but not eliminate — buyer demand, according to Denver-based mortgage adviser Nicole Rueth: “It could give the market a chance to balance out a bit for buyers.”
If you’re considering buying a home in the current rate environment, it’s important to compare offers from multiple mortgage lenders to find the lowest possible rate for your financial situation. You can browse the current mortgage rates in the table below. Then visit Credible to see your estimated rate for free without impacting your credit score.
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