Are We Approaching Bubble Territory in the U.S. Real Estate Market

April 24, 2022

Fast-rising home prices? Check. Out-of-control bidding wars? Check. Investors flooding the market? Check.

Over the past two years, the nation has watched worriedly as home prices seemed to hit a new record high every month. Many buyers have been offering six figures over asking prices to snag properties. It’s been uncomfortably reminiscent of the runup to the housing bust that blew up the world’s economy roughly 15 years ago.

As the market has progressively heated to a boiling point, most real estate experts swore up and down that the housing market wasn’t in a bubble. Mortgage interest rates were so low, in the unprecedented mid-2% range, that buyers could afford the inflated prices, they said. Lenders were no longer making bad mortgages that could trigger another foreclosure crisis. And this time around, a housing shortage that has reached crisis proportions has resulted in many more buyers than properties for sale—just the opposite of the 2007–08 pre-crash conditions. This market could support the frenzy, they explained.

But that might not be so true anymore with mortgage rates soaring to their highest point in more than a decade, hitting 5% last week as they continue their upward march. Many of those same experts are now warning the housing market might be approaching a bubble—if it isn’t in one already.

There’s only so much that homebuyers can afford before they’re priced out of the market. In March, when rates surpassed the 4% mark, the number of buyers applying for mortgages fell 5%, according to the Mortgage Bankers Association.

Nationally, buyers are paying about 42% more in their monthly mortgage payments for the same house today than they did a year ago. The potent combo of rising home prices, up 14% year over year in March, and escalating mortgage rates, which rose nearly 2 percentage points, has added hundreds, if not thousands, of dollars a month to those mortgage bills.

And that’s on top of what potential buyers are spending on everything else. Rents are up about 17% year over year, inflation is running at 8.5%, and gas prices rose about 40%. Many folks are simply tapped out.

How can the system handle skyrocketing home prices, mortgage rates, and rental prices simultaneously? Some believe it can’t.

“We’re not in a housing bubble just yet—but we’re skating close to one if prices continue rising at the current pace,” says George Ratiu, manager of economic research at Realtor.com®.  “Some markets will see a correction if mortgage rates continue to rise, in which sales will drop and prices will follow.

But “I don’t expect the market to see a huge crash or spike in foreclosures,” he adds.

Ratiu anticipates prices could fall 5% to 15%, depending on the local real estate market. Areas with struggling economies without the good jobs needed to attract new residents, such as the Rust Belt, would likely see larger price declines. Prices are already tumbling in places like Toledo, OH, and Rochester, NY.

But buyers expecting some pricing relief will likely be disappointed. Even if prices do fall, homebuyers will still be saddled with higher monthly mortgage payments. Rates have risen so much, so quickly, that they will likely more than make up for lower prices, costing homebuyers even more money.

And more desirable communities with plenty of high-paying tech and manufacturing jobs could see prices still continue to rise.

“You’re now starting to see people stretch their budgets,” says Ali Wolf, chief economist of building consultancy Zonda. “The market looks more frothy than it did just six months ago.”

Prices are likely to continue growing—for now

Article Written By: Clare Trapasso

Picture Credit: Getty

Posted in