There is a lot of uncertainty and speculation among homebuyers in US about current housing prices and its forecast. Is the US housing market in bubble phase. Let’s dive into the details.
Why the home prices surged during pandemic?
When the COVID-19 pandemic started, it led to a short period of recession and impacted the US housing market. As the vaccination started and the pandemic slowed down, it led to a rise in house prices in the US.
In July 2021 the prices hit a peak of 19.3%. Between 2013 and 2020 the housing market flourished at a moderate rate with an average of 5%. Even then, the rate of growth of house prices was much more than the rate of increase in rent.
The growth in house prices followed the recession caused by COVID-19 pandemic. This was though very different from the Great Recession which happened from 2007 to 2009 in the US.
As per a study, large transfer payments during the pandemic gave a boost to household incomes. These payments included extended unemployment benefits and stimulus checks.
The demand for housing also rose due to quite a low mortgage interest rates and accommodating monetary policies. Also, the pandemic boosted housing demand as there was an increase in the need to work from home setup.
The prices of houses which provided good accommodation and lifestyle rose exponentially as the pandemic carried on. These were some factors that gave a push to home prices across the US.
As there was a limited supply of new homes due to disruptions to the supply chain relating to building supplies in addition to work restrictions, this trend also ensured the rise in home prices.
Is it just a bubble?
The question that arises is that are we facing a housing bubble in the US. As home prices are rising even when the demand is slow, the enthusiastic speculation might be driving growth in home prices and leading to a housing bubble. The median house price has jumped by a whopping 38% between 2020 and 2022. This is clearly not normal, as the growth in average median house price in the last 20 years was 5.5%.
Even during the Great Recession which can be compared to what happened during the pandemic as there was a sudden growth in home prices, the surge in prices was just 24%. This clearly indicates that the housing market has not been so hot before in the history of the US.
This sudden and unprecedented growth in home prices raises concern for a housing bubble, though it cannot be predicted that the US market is in a housing bubble as of now.
Housing bubbles are formed when there is huge growth in home costs, which usually result because of an increase in demand, enthusiastic spending and high speculation.
What we are facing today is valid demand, but the other indicators of the housing bubble are not seen presently. The new demand for homes was also pushed by record-low mortgage rates as the government feared the housing market crash.
As there is a housing shortage, so it lowers the sign of any forming housing bubble. Still, as many as 5 million homes are required to fulfil current demand.
Recent prediction by the market experts
Many housing experts are of the opinion that the housing market will remain strong. They back this finding with certain predictions that are listed below.
- There are Plenty of Potential Homebuyers
- There are millennials and younger generations who make around half of the US population
- As per the data of National Association of Realtors, the first-time homebuyers form the largest share of homebuyers (as much as 31%)
- The buyer pool is deep, which indicates demand will remain strong in times to come
- The Supply Will Remain Less than Demand
- There is severely low supply of homes which is driving demand and surge in home prices
- This also means that market will stay strong in coming years
- The mismatch in supply and demand will lead to an increase in house prices
- The Borrowers are Less Likely to Default
- Lending standards are tighter than before
- Those approved for mortgages are less likely to default nowadays
- There are minimum credit scores and down payment requirements
- Warning Signs That Can Hamper Housing Market
- Inflation hike and increase in consumer prices
- Higher interest rates can lower consumer spending
- Economists estimate a 35% chance of the economy going into recession
These predictions suggest that investing in real restate is a good option for now.
Should homebuyers wait or take the plunge?
The housing market is showing an upwards trend, and it seems it will continue like that for years to come. As a homebuyer, what should you do? If you are looking to buy a home then it is the right time to buy as home prices will continue to surge. If you wait in this kind of market, you are going to lose options that you are getting as of now.
Many buyers think that the housing market is in the bubble right now. There is no guarantee that something like crash in prices will happen.
Homebuyers can wait or be patient and be more selective about the kind of house they would like to go with, but this doesn’t mean that they wait for too long.
As per the trends, the housing prices are going to up in times to come. As mentioned earlier in the blog, there is a mismatch between supply and demand, and it is not going to narrow down soon.
