This document is part of a series in which housing experts are asked to estimate the next five years, how investments are affecting the market, and what, if any, state or federal involvement is required. The housing market looks to be accelerating as property prices continue to rise—the average national listing price increased by double digits in April, reaching $341,600. Homebuyers will not back down despite the 19.1% increase in mortgage rates from April to April. As additional evidence shows that the real estate market is on an upward trend, many people are questioning if we are approaching a housing bubble. Will the market implode or at the very least deflate in the coming years? Forbes, a respected research organization, polled almost a dozen housing specialists to determine their predictions for the home market in the coming five years. While most analysts predict homeowner demand to remain strong, some signals that home prices may begin to fall due to growing inflation and geopolitical uncertainties.
In its end of March blog post, the Federal Reserve Bank of Dallas found symptoms of a “brewing U.S. housing bubble.” Though the sharp increase in home prices does not necessarily indicate a bubble, the report notes that “shifts in expendable cash, the cost of credit & access to it, supply shortages, and rising labor and raw construction material costs are among the financial purposes for sustained real house-price gains.” The housing market becomes “unhinged” from those reasons when “there is a widespread assumption that today’s high price rises will continue,” according to the Dallas Fed analysis. “If many purchasers believe this, purchases motivated by a ‘fear of missing out can raise prices and intensify expectations of high house-price growth.”
Despite calling the present housing market “abnormal,” the report’s authors concluded that “there is no anticipation that the consequences from a home correction will be equal to the 2007-09″ crisis in terms of scale.” Household balance sheets appear to be in better shape, and too much borrowing does not appear to be stoking the housing market boom,” according to the report, which also states that market players and regulators are best prepared with tools and warning detectors to avert such a crisis.
If you were looking for a severe slump to get a better deal on the house, think again. For various factors, most housing analysts believe the market will continue to be robust for some time.The quantity of potential homeowners is numerous, with Millennials and younger Americans accounting for half of the U.S.U.S. populace, or 166 million as of July 2019. This is noteworthy since, according to National Association of Realtors data, first-time homebuyers account for 31% of all home purchases (N.A.R.). Furthermore, most first-time buyers are under the age of 40, indicating that the buyer pool is large—a favorable indicator that demand will continue high, especially given that housing inventory is at record lows. “There will be no decline because the real estate market has seen a little rise in inventory over the last ten years.” “In a few years, Gen Z will be 30, and they will be more financially prepared to become householders than Millenials were at their age,” says Polina Ryshakov, executive director of research and principal economist at Sundae, a distressed real estate marketplace. “This means that house demand will be just as high if it is not greater than supply, but supply will still lag behind demand.”
The extremely low inventory is also boosting gasoline demand and driving up home prices, yet another reason home experts believe the market will stay solid for years to come. “The fundamental reason house prices have risen so fast is a supply-demand imbalance,” says Rick Sharga, executive vice president of RealtyTrac. “And, after not constructing nearly enough houses over the previous decade, it will take at least many years for homebuilders to add enough fresh supply to balance the market.” The months of supply in a balanced market would be roughly six months—the amount of time required to exhaust all properties for sale at the sales volume rate. However, the current market has only 1.7 months of supplies, indicating a significant imbalance in favor of sellers. It’s a good indicator that new house development increased at a 6.8% annual rate in February, the strongest rate since 2006. However, the almost 1.8 million new home starts are unlikely to impact housing values. “Reducing the housing stock debt we have accumulated will take time,” says Odeta Kushi, deputy head economist at First American Financial Corp. “The mismatch will continue to exert upward pressure on housing prices, even if growth slowed from its high in 2021.”
Among the contrasts between today’s property market and that of the 2008 housing catastrophe are tougher lending criteria due to lessons gained and new restrictions imposed in the aftermath of the last crisis. Individuals authorized for a mortgage now are less likely to fail than those granted during the pre-crisis lending time. It’s uncommon today to stumble across a lender giving so-called “no-doc loans,” in which the applicant was not required to produce income documentation—a typical practice before the housing meltdown. Furthermore, many government-backed loans have certain conditions, such as a minimum credit rating and a down payment. And among other things, authorities now want lenders to check a borrower’s capacity to repay the loan. In the last trimester of 2021, there were more than $1 trillion in new mortgage originations, with 67% of those mortgages approved for borrowers with credit scores above 760. According to FICO, this score is “extremely good.” “Lending standards have tightened, and credit ratings for new mortgages are significantly higher now than they were in begining of the 2000s,” says Nicole Bachaud, a Zillow economist. “What is far more plausible is a gradual slowing in the rate of price increase, with home values continuing to rise but not as quickly as they are currently.”
Many analysts see the economy as “going stronger,” yet there are rumblings of a recession under the surface. Inflation began to rise last year, raising concerns as commodity prices began to rise. In reaction to the inflation increase, the Federal Reserve hiked its federal fund rates in May, the largest rate hike in 22 years, indicating a possible slowdown. While the federal funds rate has a little direct impact on long-term mortgage interest rates, it does affect short-term rates such as credit card and extendable mortgages (A.R.M.s). Higher interest rates may cause a slowing in consumer expenditure. According to Goldman Sachs, the United States’ G.D.P. will grow by only 1.75% by year 22. Additionally, Goldman Sachs Group researchers predict that the economy will enter a recession, influencing the property market.
Energy costs, which were already rising, are being pushed higher since the United States and the European Union have banned Russian oil following its incursion of Ukraine. Increased energy prices will stoke the fires of inflation, which, along with increased interest rates, may drive individuals to cut down on their spending. This indicates that people may lose interest in purchasing a property.
According to the latest American Customer Satisfaction Index from the University of Michigan, consumer confidence fell to a 10-year low in March. The index decreased 30% in March to 59.4 from the previous year. According to the study, respondents were concerned about how Russia’s invasion of Ukraine might affect the U.S.U.S. economy, as well as rising inflation and fuel price increases.
The rippling effect of the U.S.U.S. oil crisis on Russia may cause even more supply-chain problems, contributing to already high inflation. Moreover, as the cost of things rises, customers become less comfortable making large expenditures, such as purchasing a home.
“Geopolitical disputes appear to be the wild card and the one that might have significant implications on inflation,” which “is likely to endure for a longer period than first thought,” according to Selma Hepp, the deputy chief economist at CoreLogic. “As a result, the Federal Reserve is likely to begin withdrawing its accommodative measures, such as higher interest rates.” An aggressive rate hike might cause more weakness, especially in the real estate markets if lending rates rise.”
Bottom line
In today’s market, homebuyers must make hard-to-make decisions. Predictions show that housing prices will continue to grow while new home production will lag, leaving purchasers in a housing crunch shortly. For some purchasers, this means relocating from large cities to cheaper metro areas. Others will have to extend their budget or make do with less space or other perks. Then some purchasers are ready to take a chance and waive crucial stipulations such as the termite inspection to increase the value of their offer. However, this may cost them more over the long term if the house has severe flaws that were not noticed and remedied by the seller during the inspection.
On the contrary, hand, securing a home today, even if it entails preceding other expenditures, may result in future savings if home values and wealth continue to climb. They may also save money by purchasing a property and locking in rates before interest rates and housing prices rise. However, the converse might be true if there is a possibility that low supply combined with growing inflation would harm the housing market and cause prices to decline, especially if the economy enters a recession. “If we do not try to find solutions for the housing supply shortfalls, we risk fueling the flames of inflation instead of extinguishing them.” The outcome might be stagflation,’ a term most of us haven’t heard in a generation—high inflation and an economic downturn,” says David Dworkin, president and CEO of the National Housing Conference. “This would decimate the home economy and worsen our present home supply issues.”
If home values fall quickly, purchasers may find themselves with mortgage debt, which means they must either remain in the house until the market recovers or sell and lose money. While housing experts believe this possibility is unlikely, it should not be dismissed. This occurs when purchasers are forced to compete in bidding wars or pay more than a house’s appraised value. While this strategy has its uses, it must be carefully considered if the home, neighborhood, and time you want to spend in that place are worth it over the long term. Another crucial factor in this marketplace is how much you want to stay in the house. People purchasing their “forever home” have less to fear if the marketplace reverses since they can ride the ups and downs of the market. However, buyers who plan to move within a few years are more vulnerable if the market falls. That’s why it’s critical to look for a broker and lender who are seasoned housing specialists in your desired area and whom you can rely on to provide excellent guidance from the start.
