With stock prices cratering and bond yields soaring, it’s a fair question to ask if the housing bubble is about to burst, too. After all, home prices have skyrocketed in recent years thanks to artificially low-interest rates engineered by the Federal Reserve, which has kept mortgage rates well below historic levels ever since the 2008 global financial crisis, even well under 4% for most of the past three years. But with the average rate on a 30-year fixed-rate mortgage now at more than 5% and climbing, is the home price boom still sustainable?
According to the National Association of Realtors, the median price of a single-family home has jumped by over $100,000, or more than 39%, to $382,000 in March from $274,000 in 2019. The median principal and interest payment has increased by nearly 50%, to $1,502 from $1,054 three years ago, while the percentage of monthly income the typical mortgage payment eats up has risen to more than 20% from less than 16% in 2019. Likewise, the group’s affordability index, which measures whether a typical family earns enough to qualify for a mortgage, has dropped to 124.0 from nearly 160. While the NAR says the median family income has increased more than 10% to $89,321 from $80,808 during that time, the amount of income needed to qualify for a mortgage to buy a median-priced home has jumped by more than 40%, to more than $72,000.
Now, these NAR figures are as of March, when the average rate on a 30-year mortgage was 4.24%. Since then, that figure has risen by more than 100 basis points, to more than 5.25%.
So, is this a bubble ripe for the popping?
Many mortgage and housing analysts will tell you that we’re not in a 2008-type credit-driven bubble, which was caused by overly lax lending standards and the failure of the Fed to rein them in. As we know, when that bubble popped, it was big enough to bring down most of the international financial system (although there were other factors as well). That’s true. But that doesn’t mean that prices can’t go down, and it’s hard to see how prices can continue to advance to the degree they have over the past several years, given the numbers I just cited. The most optimistic scenario for housing is that pace of price increases will start to slow, versus an outright decline in home values. That’s what I think will happen, but it could be worse in specific local markets.
Now, there are many mitigating factors that argue against an actual price drop. The first is one I just mentioned, namely that lenders have not been complicit in raising prices by approving mortgages for anyone with a pulse as they used to in the runup to 2008. Lenders have been forced by Dodd-Frank and other post-crisis federal regulations to make sure as best they can that (get this) mortgage borrowers can actually repay their loans. While loan underwriting will never be perfect, it’s certainly a lot stricter than it was back then.
Another reason is that a high percentage of homes have been purchased with cash in recent years, despite record-low mortgage rates. According to Redfin, nearly one-third, or 30%, of U.S. homes purchased in 2021 were paid for with cash, up from 25.3% during the previous year and the largest share since 2014. We can probably expect that figure to decline as the stock market drops, but it’s still a high number.
But the biggest reason for arguing for the housing market to stay strong is simple supply and demand, and right now, demand continues to outstrip the available supply. Since the 2008 financial crisis, when the housing bubble burst, builders have been unable to construct enough houses to replace those that get demolished each year, never mind enough to meet the demand from newly-formed households, mainly headed by millennials.
More importantly, the number of existing homes for sale has been held in check by the rise in prices; there are undoubtedly lots of older homeowners who would be happy to cash in and sell their homes at today’s record prices, but then where would they go? They simply can’t afford to move, not at today’s inflated prices and interest rates. They’re stuck, which keeps millions of homes off the market and a floor under prices.
But there’s another silver lining for housing. Should the newly hawkish Fed overreach and send the economy into recession, which history says is likely, guess what? Rates will then drop, which will be another elixir for the housing market.