House prices cannot go up indefinitely. But it’s probably not a bubble

All of this raises fears that the United States is in the middle of another real estate bubble that will end in a terrible crash. Industry executives and economists agree that this explosion in home values ​​is unsustainable, as home prices cannot rise 20% year over year forever.

“In some ways, the housing market is even warmer than it was before the Great Recession,” said Aneta Markowska, chief economist at Jefferies. “But the risk of it turning into a bubble is much lower.”

Bank of America economists concede that house prices may correct downward in some markets in the short to medium term.

Still, the bank told customers in a recent memo that a “hard landing is unlikely” this time around.

“We have a housing shortage”

Of course, Bank of America acknowledged that “bubbles are notoriously difficult to identify in real time.” They only become evident in hindsight. This is what makes them bubbles.

“In the end, we ended up with oversupply. That’s what caused the market to collapse,” Markowska said.

At the end of June, there were only 1.25 million existing homes for sale. This is almost 19% less than a year ago. At the current rate, that equates to just 2.6 months of supply, less than half of the six months considered a balanced market.

“We have a housing shortage. When there is a shortage, prices don’t go down,” said Lawrence Yun, chief economist at the National Association of Realtors.

The median price of an existing home hit a record high of $ 363,300 in June, up 23% from the previous 12 months.

Prevent a boom-bust scenario

The good news is that there are signs that the housing market is correcting itself due to these skyrocketing price increases.

New home sales unexpectedly fell in June at the weakest pace since April 2020, according to data released on Monday, marking the third consecutive month of decline. Existing home sales declined for four straight months before increasing slightly in June.

“Some buyers are just overpriced,” Yun said.

“It can be a blessing in disguise,” Jefferies’ Markowska said, noting that home prices could cool as inventories rise. “This lengthens the housing cycle and prevents a boom-bust dynamic.”

NINJA loans are out of fashion

The other crucial difference between now and the mid-2000s is that borrowing hasn’t gotten out of hand, at least not yet.

“Unlike ’08 and ’09, when there was huge leverage and bad mortgage underwriting, there isn’t a lot of leverage and a lot better mortgage underwriting,” Dimon said.

“Lenders are much more responsible this time around,” PNC chief economist Gus Faucher said, referring to the industry as a whole. “We haven’t seen a return to loans with no documentation and no down payment. This will help prevent a crash.”

The risk of fire sale is lower

The Fed’s rate hikes today could slow the housing market by making mortgages more expensive for potential buyers. But very few borrowers would be forced to pay more for existing mortgages. This is because only 2% of the outstanding securitized mortgage debt is under variable rate mortgages, according to Bank of America. This is down sharply from 21% in 2006.

Homeowners’ balance sheets are also much stronger today.

This is crucial because excessive leverage is what allowed the bursting of the mid-2000s real estate bubble to spiral out of control.

“Less leverage means household balance sheets are better positioned to deal with falling house prices,” Bank of America economists wrote. “Therefore, it is unlikely that we will see a wave of defaults, leading to untimely sales.”