Over the last few weeks, we’ve watched nearly every market go into freefall — the stock market, cryptocurrencies, and precious metals.
So far, one seems untouched: Housing – Investors may have reduced investments because of concerns about the long-talked-about housing market crash. However, many think prices could continue to rise inflating the housing market bubble further — here’s why.
The US Housing Market Right Now
At first glance, it seems like the economic conditions in the housing market for first time home buyers have waited for could finally be here.
Interest rates are rising, meaning it’s more expensive to buy a house now than in previous months.
At the start of 2022, the federal funds rate was close to 0%, and many buyers secured mortgage rates between 2% and 3%. But the fed rate rose to 0.33% in March 2022 and then again to 0.83% in May. As a result, mortgage rates are now hovering around the 5% mark.
The increase is a response to inflation, which is running rampant at around 8% — higher interest rates discourage borrowing and therefore stimulate the economy less.
Yet wages have failed to rise with inflation, with fewer than 25% of employers considering raising salaries to compensate for recent price increases.
In other words, we’re living in a country combating a cost of living crisis and high-interest rates.
Plus, given the explosion of people buying houses during the pandemic, you might expect the number of potential buyers to have calmed down by now.
It seems reasonable to expect demand for housing to drop in this kind of environment, leading to a fall in prices.
Yet there’s little to no evidence to support this logical hypothesis, and most research suggests that precisely the opposite would happen.
Analyst Predictions for the Housing Market Bubble
In February, a poll of 33 property analysts found that these experts predicted US house prices would rise by 10.3% in 2022.
The prediction was even higher than the same poll from September when the same group estimated prices would rise by 8% this year.
The estimates are based on the Case/Shiller Index, a leading measure of residential real estate prices.
It’s not just a distorted average. 57% of those surveyed believed house prices would increase in double digits in 2022, and only one respondent thought this year wouldn’t be a seller’s market (meaning sellers have the upper hand over buyers in the market).
It’s still relatively early in 2022 to reach a clear conclusion about which direction house prices are moving in, but the evidence seems to be in line with their predictions.
The average sale price in the US was $507,800 in the first quarter of 2022, compared to $497,000 in the final quarter of 2021. The increase of just over 2% might not sound like much, but this change took place in only a few months.
Why Will Prices Rise?
This outcome observed so far might seem counterintuitive, but there are a few potential explanations.
There’s still a lack of housing inventory (aka listings), which ensures the market remains tight – stocks are at record lows.
A lack of supply increases the likelihood of multiple buyers competing for a single property, meaning there’s more chance of the dreaded overbidding and biasing prices upward.
Even if demand begins to slow due to the broader economic conditions, if supply decreases or remains very low, it will act as a kind of counterweight.
This phenomenon can also distort statistics — the figures might show that house sales are dropping, but if this is due to the low numbers of properties available, prices will not lower.
Besides, high numbers are still searching for homes despite the numbers of homebuyers who purchased houses during the pandemic. In March 2022, houses sold stayed on the market for just 17 days on average, suggesting that plenty of people are still anxious to snap housing up.
This statistic might partly be because first-time buyers only make up around 27% of home sales — even if current prices are becoming unaffordable for this group, there are plenty of property investors or second-home buyers who have the funds.
What About 2023?
Even if house prices are set to increase in 2022, you might wonder if a house crash is coming in the future — what about 2023 or 2024?
The same survey asked the property analysts what they expected to happen in the coming year, and this time, the predictions were a little better.
The majority thought prices would rise by 5% in 2023 and 4.1% in 2024, showing some level of market stabilization.
However, analysts thought it would take a fed rate of 1.75% for house prices to slow down finally. Even though many expect the funds rate to reach 1% by the end of 2022, that’s still a long way from where it would need to be.
Plus, the Russia-Ukraine conflict is a big question mark. It’s possible the tensions could keep interest rates low since higher oil prices have driven inflation (lower interest rates are typically a way of keeping inflation under control).
But it’s tough to speculate about the years to come when nobody truly knows what will happen in 2022.
There’s hardly a consensus about house prices rising 10% this year. For instance, CoreLogic predicts that housing prices could decrease over 2022 once the impact of higher mortgage rates sinks in.
Final Word for the Housing Market Bubble
It’s clear that purchasing a house for the first time is becoming increasingly out of reach for the average person, yet most experts think this won’t change the market any time soon.
There’s still plenty of demand for the limited number of houses available, and interest rates aren’t high enough to put these buyers off.
Unless you’re the betting type, don’t hang around in anticipation of a crash if you’re waiting to join the property ladder.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has investments in real estate.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.