Rick Nazarro of Colonial Manor Realty speaks to two interested buyers in the driveway while a couple waits to enter a property he plans to sell during a “controlled” open house on May 2, 2020 in Revere, MA.
Blake Nissen | Boston Globe | Getty Images
The real estate market has been in high demand over the past year thanks to staying at home and working from anywhere in the coronavirus pandemic culture.
However, consumers are increasingly concerned that housing is experiencing a price bubble – and that the bubble may be ready to burst.
Google reported last week that the search question “When is the real estate market going to crash?” had gained 2,450% in the past month. “Why is the market so hot?” The search had doubled in just a week.
And in the most revealing indication that the market is in a bubble, “How Much Above the Price I Should Offer a Home in 2021” rose 350% in the same week.
There are several metrics for house prices, but one of the most recent and watched is that of CoreLogic, which saw prices jump 10.4% year over year in February. This is the biggest annual jump since 2006.
“We have an acute shortage of supply in the market for sale, while at the same time low mortgage rates are increasing the buying appetite of Millennials and Gen-Xers,” said Frank Nothaft, Chief Economist at CoreLogic.
According to realtor.com, around half as many houses are actively for sale as there were a year ago. This has caused competition to ignite to such an extent that buyers are more likely to get into bidding wars.
This Google question about overpayment doesn’t go well with Nothaft.
“I have to admit that I worry when I hear this. It worries me,” he said. “That’s the mindset that comes into play because that means it’s an auction market.”
Earlier this month, real estate agent Redfin said 42% of homes were selling for more than their list price. This was 16 percentage points more than in the same period of the previous year.
“The real estate market is more competitive than ever, but some indicators make us wonder if we are nearing a peak in how quickly demand and prices can grow,” said Daryl Fairweather, Redfin Chief Economist. “The sellers’ asking prices could gradually flatten out, which so far seems to be following a typical seasonal pattern.”
Fairweather sees the decline in mortgage sales as a sign that some people are dropping out of the market because of a lack of affordable property to sell.
If these trends continue, it could mean we are “not in the midst of runaway property price speculation or a housing bubble”.
While mortgage rates are rising, which they are slowly doing now, and buyers are reaching an affordable limit, Nothaft is expecting annual national price increases for homes that will cool down to 3% nationally. But all properties are local.
A “For Sale” sign near a group of homes under construction in the Norton Commons subdivision in Louisville, Kentucky on Monday March 8, 2021.
Luke Sharrett | Bloomberg | Getty Images
“That means there will be some markets that will have no price growth at all,” Nothaft said, adding, “I think we will probably see some markets correctly.”
Nearly 75% of the 100 largest US real estate markets saw house prices grow 10% or more annually, according to Black Knight. Markets with the strongest price increases could be most at risk.
Many of them are to the west, where the Californians gathered during the recent exodus. That includes Boise City, Idaho, where prices are rising 26% annually, according to Black Knight. Spokane, Washington (+ 20%); Ogden, Utah (+ 20%) and Phoenix (+ 18%) follow.
Cities with the slowest increases in home prices are Chicago, Houston, New Orleans, Orlando, Florida, and Pittsburgh, all with single-digit growth rates.
“All hopes for 2021 of an influx of homes and easing pressure on prices seem to be dashed for now,” wrote Ben Graboske, president of data and analysis at Black Knight, noting the decline in the market new sales offers in January and February. “With higher interest rates and ongoing inventory shortages, it will be important to keep an eye on both home prices and affordability metrics over the coming months.”
Builders are slowly ramping up production, and new government Covid incentives could help. As the economy opens up and more Americans get vaccinated, there could be a rebirth in the cities that takes some of the strain off all of the competition in the suburbs. So is the real estate market going to collapse? Unlikely.
It’s going to be cool, no question about it, but unlike the big real estate crash a decade ago, mortgage drawing is very strict now, so most homeowners can afford the houses they are in right now.
If prices cool or even drop slightly in some markets, it will not create a foreclosure crisis. Given the high demand for rental properties, investors are also fairly well represented in the market, which should serve as a setback for significant price drops.