Are We At Risk For A Housing Bubble? Here’s What The Experts Are Saying

Dated: December 3 2021

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Natalie Campisi
Forbes Advisor Staff

Talk to almost anyone in America about surging home prices, and you’ll come around to the trillion-dollar question: Are we in a housing bubble? Or, at the very least, when will these runaway prices abate?

According to the National Association of Realtors (NAR), the pace of home price appreciation slowed in the third quarter of 2021 compared to the previous quarter, rising 16% year-over-year (compared to 22.9% in the prior quarter). But this double-digit price growth is still strong considering that annual home price growth over the long term averages around 3.5%.

Home prices rose in 99% of the 183 markets NAR tracked in the third quarter, and 78% of them saw double-digit spikes in appreciation. In other words, it’s just another day in a super-hot housing market.

Most Economists Forecast a Continued Strong Sellers Market

Housing experts are bullish about the current market because of what they call “solid fundamentals.” Creditworthy borrowers and strict mortgage qualifications coupled with a basic supply-and-demand imbalance have created a strong seller’s market that, according to some, could last at least 10 years.

“In the long run, the party won’t go on forever, but it will absolutely go on for the next five to 10 years. Millennials are driving the housing market, and even Gen X and baby boomers are looking for places to live—so that’s all healthy demand,” says Ralph McLaughlin, chief economist at Kukun, a real estate analytics company. “Demand for homes doesn’t look great beyond 2039 unless we open borders to immigration because birth rates are falling.”

According to the NAR, single-family home construction has lagged so dramatically that we’re now facing a 5.5 million home shortage. And if you add home casualties caused by “demolition, natural disaster or functional obsolescence” to the list, that undersupply spikes to 6.8 million homes.

Investment bankers are also optimistic about the housing market, even as rising home prices challenge affordability, and bleak homebuyer sentiment might hint at a pullback in demand. In the latest Fannie Mae National Housing Survey, 65% of respondents said this was a bad time to buy a house.

A recent report by Goldman Sachs acknowledges the potential demand problems. Still, analysts at the leading investment bank are betting on new household formation from millennials. The report states that “while the huge increase in home prices over the last year has reduced housing affordability, housing in the U.S. remains affordable relative to historical standards because rates are still low and household incomes have remained largely intact.”

Investors are adding to the soaring home prices, elbowing out primary buyers (those who intend to live in the home) with deep pockets. Investor purchases spiked 59% in July 2021 compared to the same period last year, according to a report by Realtor.com.

Speculation has been driven by enormous gains in housing, leading some investors to buy or build single-family homes and then rent rather than sell them.

Christy Budnick, CEO at Berkshire Hathaway HomeServices, doesn’t see a downturn in housing anytime soon, pointing to the same fundamentals as most optimistic housing experts. However, she does recognize the growing affordability problem, which she believes may require government intervention.

“In this sort of market, it will be difficult to generate affordable housing unless the federal government works with local governments to create plans specifically targeting affordable housing,” Budnick says. “Sadly, first-time homebuyers have been negatively impacted. Many mortgage programs are available to help in the affordable housing arena, but when there are multiple bids and cash offers being made above the listing price, these offers get left behind.”

Analyst Who Predicted Housing Crisis Rings Warning Bell Again

But not all housing experts agree that we’re in for a long decade of a strong seller’s market. There are a small number of dissidents, including Ivy Zelman, an analyst who portended the 2008 housing crisis as early as 2005.

Zelman worries that there won’t be enough people to buy the houses we’re building, contrasting the general refrain that there’s an overabundance of demand. Falling fertility rates, an aging population, an uptick in multigenerational housing and not enough immigrants to make up for the reduction are the main drivers of a declining population and new household formation.

“Our view is that with decelerating household growth, we’re in the midst of a pipeline of supply over a level of what will be normalized demand,” Zelman says. “The number of people who are living multigenrationally is rising, and homebuyers are not coming from these multigenerational homes. The stigma of living at home is not such a big deal anymore,” Zelman says.

The overestimation of demand coupled with the rapacious investor activity is a recipe for disaster. With the number of nonprimary buyers in the market, inflation is booming, creating artificial, short-lived appreciation if people stop buying, she says.

“Institutional capital is fueling home sale velocity because it’s an attractive asset class. They have to put the money they have somewhere, and they have an expectation of return, but where are these bodies going to come from?” Zelman says.

Kristen Conti, a broker-owner at Peacock Premier Properties in Englewood, Florida, and co-chair for Default Industry Leaders, a nationwide non-profit, has been in real estate for 27 years and sees similarities between today’s market and the last housing bubble.

“Right now we’re seeing rapidly rising prices; there’s no chance for local mortgage buyers to purchase against cash; there’s a high number of building permits in process; we have rising inflation; and instability in the markets—these are all signs I saw before the last bubble. So, I say yes, we are looking at a bubble,” Conti says.

Conti is starting to see changes in buyer behavior since the housing frenzy began; people who might’ve taken significant risks before are beginning to be more conservative when buying a house.

“I track the market daily, and I see homes back on the market regularly due to repair issues or appraisal shortages. Even cash buyers are not standing for poor conditions like they have been for the last year. Many signs all around of a market in transition,” Conti says.

She also says that some people will undoubtedly lose appreciation and even underwater mortgages in some situations.

“All those buyers who chose to ignore the advice of Realtors who were looking out for them and pay well over the asking price with minimal down payments are at risk of being underwater with their mortgage,” Conti says.

What Homebuyers and Homeowners Should Know

Whether you’re a buyer, owner or renter, today’s rising prices have some effect on your wallet. For would-be homebuyers sidelined by all-cash buyers and sky-high prices, trying to figure out when to buy (or not to buy) can feel like jumping on a moving train. The timing is everything.

Homeowners are in the best position as they’re reaping enormous gains in equity, but they also face the possibility of losing some or all of the appreciation they’ve captured if we are indeed headed for a downturn. And finally, renters are contending with rising rental costs thanks to inflation, tight housing supply and an increase in people looking for places to rent.

Here are a few things buyers and homeowners should keep in mind as we wade through today’s market.

Don’t Zap Your Equity When You Refinance

For homeowners who are seeing their home value grow overnight, it might be tempting to refinance and grab some of that cash—but many housing experts advise people to hold onto their equity unless they need it for an emergency.

Spending your equity can be dangerous because if there is a downturn and your property loses value, it can be harder to sell, leading to thornier problems if you can no longer afford the mortgage.

“If you are going to refinance only do so to drop your rate or reduce your term, don’t get sucked into the maximization of a cashout option just to spend on nonessentials,” Andreis Bergeron, head of brokerage operations at Awning, a real estate investment company. “If considering a cash-out refinance, first consider building up cash reserves, so you have a six-month personal burn rate safely in the bank in case of income disruption.”

What Can Homeowners Do If There Is a Downturn

Carolina Gerdts, executive vice president at residential and commercial real estate brokerage firm RelatedISG Realty, advises homeowners facing a downturn to refinance their mortgage to cut down on payments and get rid of private mortgage insurance.

“Refinancing can save people a lot of money. But they also need to stay in their house throughout these low inventories and not take out equity,” Gerdts says. “They need not use their houses to get cash.”

Bergeron offers creative ways for homeowners to hang onto their homes if they struggle to pay their mortgage. He points to the rise of short-term rentals and companies like Airbnb as a moneymaking opportunity for homeowners to earn passive income with their homes.

“If homeowners find themselves in a situation where they can no longer afford the mortgage, they should consider renting out a room to generate additional mortgage payment liquidity, “ Bergeron says. “Lastly, the most drastic action you could take would be to sell your home in the bubble and to rent for a few years. This strategy would reduce risk and allow the homeowner to capture the price appreciation the property has already enjoyed.”

Timing the Market Is Tough for Buyers

Unfortunately, there is no way of knowing when prices will start to decline for would-be homebuyers wondering if this is a good time to buy. But what is generally true is that the longer you plan on staying in your home, the better your chances of realizing equity gains.

Most housing experts agree that the double-digit home price appreciation the market realized in the last year won’t continue, and there will be a slowing of appreciation. Additionally, mortgage rates are expected to rise in the coming months, stalling demand on both the investor and primary buyer fronts.

So, if home price appreciation slows, buyers have to factor in closing costs and estimated annual appreciation because that can dictate how long they have to wait to sell.

“Inventory is tight right now, so you might not find your forever home today,” McLaughlin says. “But if you find something you like, that’s within your budget, and you plan to hold onto it for a few years, then buying a house might be cheaper than renting. Once you accumulate enough equity, you can sell it and maybe get that forever home.”

Original article: https://www.forbes.com/advisor/mortgages/housing-bubble-experts/ 

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