Will The Housing Market Crash? Experts Give 5-Year ... - Forbes

Though the sharp increase in home prices in itself does not indicate a bubble, the report said, there are other fundamental factors to consider, ... SelectRegion UnitedStates UnitedKingdom Germany India Youmightbeusinganunsupportedoroutdatedbrowser.TogetthebestpossibleexperiencepleaseusethelatestversionofChrome,Firefox,Safari,orMicrosoftEdgetoviewthiswebsite. advisor Mortgages AdvertiserDisclosure WillTheHousingMarketCrash?ExpertsGive5-YearPredictions. NatalieCampisiForbesAdvisorStaffReviewedByRachelWitkowskieditorReviewedByUpdated:May4,2022,11:30am EditorialNote:WeearnacommissionfrompartnerlinksonForbesAdvisor.Commissionsdonotaffectoureditors'opinionsorevaluations. Getty Thisstoryispartofaseriesthataskshousingexpertstogivetheirforecastforthenextfiveyears,howinvestorsareimpactingthemarket,andwhatstateorfederalintervention,ifany,isneeded. Thehousingmarketappearstobeoperatingwithoutbrakesashomepricescontinuetoclimb–thenationalmedianlistingpricesawanotherdouble-digitincreaseinApril,climbingto$341,600.inEvenwithApril’s19.1%jumpfromayearago mortgageratescontinuetotickup,andbuyersarenotbackingdown. Asmoresignsindicatethehousingmarketisonafast-pacedupwardtrajectory,manyarewondering:Areweenteringahousingbubble?Andwillthemarketcrashoratleast,deflateatanypointinthenearfuture? ForbesAdvisoraskednearlyadozenhousingexpertswhattheirforecastisforthehousingmarketinthenextfiveyears.Whilemostexpertsexpecthomebuyerdemandtocontinuetherearesomewarningsignsthathomepricescouldfalteramidrisinginflationandgeopoliticaluncertainty. AreWeHeadedIntoaHousingBubble? TheFederalReserveBankofDallasidentifiedsignsofa“brewingU.S.housingbubble” inablogpostMarch29.Thoughthesharpincreaseinhomepricesinitselfdoesnotindicateabubble,thereportsaid,thereareotherfundamentalfactorstoconsider,including“shiftsindisposableincome,thecostofcreditandaccesstoit,supplydisruptions,andrisinglaborandrawconstructionmaterialscostsareamongtheeconomicreasonsforsustainedrealhouse-pricegains.” Whatcausesthehousingmarkettobe“unhinged”fromthosefundamentals,iswhen “thereiswidespreadbeliefthattoday’srobustpriceincreaseswillcontinue,”theDallasFedreportsaid.“Ifmanybuyerssharethisbelief,purchasesarisingfroma‘fearofmissingout’candriveuppricesandheightenexpectationsofstronghouse-pricegains.” Eventhoughthereportcalledthecurrenthousingmarket“abnormal,”theauthorsconcludedthat“thereisnoexpectationthatfalloutfromahousingcorrectionwouldbecomparabletothe2007–09”crisisintermsofitsmagnitude.   “Householdbalancesheetsappearinbettershape,andexcessiveborrowingdoesn’tappeartobefuelingthehousingmarketboom,”saidthereport,addingthatmarketparticipantsandregulatorsarebetterequippedwithtoolsandearlywarningdetectorstothwartsuchacrisis. WhytheHousingMarketWillLikelyStayHot Ifyouwerehopingforamajordownturntosnagacheaperhome,thinkagain.Mosthousingexpertsarepredictingthemarkettoremainstrongforawhileforseveralreasons. 1.MillennialDemandforHousingisUp,WithGenZRightBehind Thenumberofpotentialhomebuyersisplentiful,withAmericanswhoareeitherMillennial-agedoryoungermakinguphalfoftheU.S.population,or166millionasofJuly2019.Thisissignificantbecausefirst-timehomebuyersrepresentthelargestshare(31%)ofpeoplepurchasinghomes,accordingtodatafromtheNationalAssociationofRealtors(NAR).Andmostfirst-timebuyersareyoungerthan40,whichmeansthebuyerpoolisdeep–agoodindicationthatdemandwillremainstrong,especiallysincehousinginventoryisathistoricallows. “Wewon’tseeadownturnbecausethehousingmarketsawlittleincreaseininventoryforthepasttenyears.Inafewyears,GenZwillbeturning30,andmorefinanciallyreadytobecomehomeownersthanMillenialswereattheirage,”saysPolinaRyshakov,seniordirectorofresearchandleadeconomistatSundae,arealestatemarketplacefordistressedproperties. “Thismeansthatthedemandforhomeswillbeashigh,ifnothigher,whileinventorywillstillbebehindinthedemand.” Homebuyergeneration %of2021buyers Medianageingroup GenZers:21yearsandyounger 2 21 YoungerGenY/Millennials:22to30years 14 27 OlderGenY/Millennials:31to40years 23 35 GenXers:41to55years 24 48 YoungerBoomers:56to65years 18 61 OlderBoomers:66to74years 14 69 SilentGeneration:75to95years 5 78 Source:NationalAssociationofRealtors 2.SupplyCan’tKeepUpWithDemand Theseverelylowsupplyisalsohelpingfueldemand,andhigherhomeprices,whichisanotherreasonwhyhousingexpertssaythemarketwillremainstrongforyearstocome. “Thesupply-demandimbalanceistheprimaryreasonhomepriceshaveescalatedsorapidly,”saysRickSharga,executivevicepresidentatRealtyTrac.“Andafternotbuildingnearlyenoughhousesforthelastdecade,homebuilderswilltakeseveralyearsatleasttoaddenoughnewsupplytobalancethemarket.” Inabalancedmarket,themonthsofsupplywouldbearoundsixmonths–thetimeitwouldtaketodepleteallhomesforsaleatthecurrentsalespace.Buttoday’smarkethasonly1.7monthsofsupply,showingadrasticimbalanceinfavorofsellers. Itisahelpfulsignthatnewhomeconstructionclimbedatanannualrateof6.8%inFebruary,thefastestgrowthsince2006.Butthenearly1.8millionnewhomesstartsareunlikelytoputadentinhomeprices. “Itwilltaketimetoreducethehousingstockdebtwehaveaccumulated,”says OdetaKushi,deputychiefeconomistatFirstAmericanFinancialCorp.“Theimbalancewillcontinuetoputupwardpressureonhouseprices,eveniftheymoderatefromthepeakpaceofgrowthin2021.” 3.BorrowersAreLessLikelyToDefaultOnTheirMortgages Amongthedifferencesbetweentoday’shousingmarketandthatofthe2008housingcrashisthatlendingstandardsaretighterduetolessonslearnedandnewregulationsenactedafterthelastcrisis.Essentially,thatmeansthoseapprovedforamortgagenowadaysarelesslikelytodefaultthanthosewhowereapprovedinthepre-crisislendingperiod. It’sraretodaytocomeacrossalenderofferingso-called“no-docloans”wheretheapplicantdidnothavetoprovidedocumentationofincome—acommonpracticebeforethehousingcrash.Also,manyloansbackedbythegovernmenthaveacertainsetofstandards,likeminimumcreditscoreanddownpaymentrequirements.Andregulatorsnowexpectlenderstoverifyaborrower’sabilitytorepaytheloan,amongotherstandards. Therewasmorethan$1trillioninnewmortgageoriginationsinthefourthquarterof2021with67%ofthosemortgagesgoingtoborrowerswithcreditscoresexceeding760.Thisscoreisconsidered“verygood,”accordingtoFICO. “Lendingstandardshavegottentighterandcreditscoresfornewmortgagesaremuchhigheronaveragenowthantheywereintheearly2000s,”saysNicoleBachaud,aneconomistatZillow.“What’smuchmorelikelyisagradualslowdowninthepaceofpriceappreciationwherehomepricescontinuegrowing,justnotasfastastheyarenow.” 4.WarningSignsThatCouldDampentheHousingMarket Murmursofarecessionhavebreachedthesurfaceofwhat’sotherwisebeendescribedbymanyobserversasa“strengtheningeconomy.”Inflationstartedrisinglastyear,settingoffalarmbellsasconsumerpricesbegantoclimb. Inresponsetotheinflationhike,theFederalReserveraiseditsfederalfundsrateinMay—thebiggestFedratehikein22years—asigntherecouldbeaslowdown.Whilethefederalfundsratedoesnotdirectlyimpactlong-termmortgagerates,itdoeshaveaneffectonshort-termrateslikecreditcardsandadjustable-ratemortgages(ARMs).Higherinterestratescouldtriggeraslowdowninconsumerspending. GoldmanSachsprojectsU.S.GDPfortheendof2022toexpandbyamere1.75%.Additionally,economistsatGoldmanSachsGroupestimateuptoa35%chancethattheeconomywillgointorecession,whichwouldimpactthehousingmarket. Russia’sWaronUkraineWon’tHelptheEconomy Energyprices,whichwerealreadyontherise,arefacingmoreupwardpressureastheU.S.andEurozonehasbannedRussianoilafteritsinvasionofUkraine.Higherenergypriceswillcontinuetofantheflamesofinflation,whichalongwithhigherinterestrates,couldcausepeopletopullbackonspending.Thismeansconsumerscouldlosesomeappetiteforhomebuyingaswell. Consumerconfidencedroppedtoa10-yearlowinMarch,accordingtotheUniversityofMichigan’slatestConsumerSentimentIndex.Theindexfell30%to59.4inMarchcomparedtolastyear.ThesurveyshowedthatrespondentswereanxiousabouthowRussia’sinvasionofUkrainecouldimpacttheU.S.economy,aswellashighinflationandoilpricejumps. TherippleeffectoftheU.S.oilembargoonRussiacanleadtoevenmoreproblemswithsupply-chainissues,whichwillcontributetoalreadyheightenedinflation.Asthecostofgoodsincreases,consumerstendtobelesscomfortablemakingbigpurchaseslikebuyingahome. “Geopoliticalconflictsseemtobethewildcardandtheonethatcouldhavefurtherimpactsoninflation,”which“islikelytopersistlongerthaninitiallyexpected,”saysSelmaHepp,deputychiefeconomistatCoreLogic.“Asaresult,theFederalReserveisexpectedtostartremovingitsaccommodatingpolicies,includingrisinginterestrates.Anaggressiveincreaseinratescouldbringaboutmoresoftening,particularlyinthehousingmarketsifmortgageratesspike.” WhatHomebuyersShouldDo Homebuyersarefacedwithtoughchoicesintoday’smarket.Predictionsindicatethathomepriceswillcontinuetoriseandnewhomeconstructionwillcontinuetolagbehind,puttingbuyersintighthousingsituationsfortheforeseeablefuture. Forsomebuyers,thatmeansmovingawayfrombigcitiesintomoreaffordablemetros.Forothers,itmeansstretchingtheirbudgetorcompromisingonsizeorotheramenities.Andthentherearebuyerswillingtorollthediceandforgoimportantcontingencieslikethehomeinspectioninordertosweetentheiroffer.Thiscouldendupcostingthemmoreinthelongrunifthehouseendsuphavingmajorproblemsnotdetectedandfixedbytheselleruponinspection. Ontheotherhand,snaggingahousenow,evenifitmeanssacrificingotherpurchases,couldmeansavingmoneydowntheroadifhomepricesandequitycontinuetorise.There’sachancetheycouldalsosavebygettingahouseandlockinginaratebeforebothratesandhomepricesincrease. Thenagain,theoppositecanbetruewhenthere’stheriskthatlimitedsupplycoupledwithrisinginflationcouldgetsoextremethatithurtsthehousingmarketandpricesfall,particularlyiftheeconomygoesintoarecession. “Ifwefailtoaddressshortagesinhousingsupply,weruntheriskoffuelingthefiresofinflationratherthanextinguishingthem.Theresultcouldbe‘stagflation,’awordmostofushaven’tusedinageneration–-highinflationandeconomicrecession,”saysDavidDworkin,presidentandchiefexecutiveofficeroftheNationalHousingConference.“Thiswoulddevastatethehousingeconomyandonlyexacerbateourcurrenthousingsupplychallenges.” Ifhomepricesdropsuddenly,buyerscouldbestuckwithunderwatermortgages,whichmeanstheyhavetostayinthehouseuntilthemarketrebounds,ortheysellandlosemoney.Whilehousingexpertspredictthisscenarioisunlikely,still,itshouldnotbeignored. Thiscomesintoplaywhenbuyersarefacedwithbiddingwarsorevenpayingovertheappraisedvalueofahome.Whilethereareinstanceswherethistacticshouldbeapplied,itmustbecarefullythoughtoutonwhetherthehome,neighborhoodandtimeyouplantospendinthathouseareworthitinthelongrun. Anotherimportantconsiderationinthismarketishowlongyouplanonstayinginthehome.Peoplewhoarebuyingtheir“foreverhome”havelesstofearifthemarketreversesastheycanridethewaveofupsanddowns.Buyerswhoplanonmovinginafewyearsareinariskierpositionifthemarketplummets.That’swhyit’ssoimportanttoshopattheoutsetforarealtorandlenderwhoareexperiencedhousingexpertsinyourmarketofinterestandwhoyoutrusttogivesoundadvice. Faster,easiermortgagelending CheckyourratestodaywithBetterMortgage. ViewRates Wasthisarticlehelpful? Shareyourfeedback Sendfeedbacktotheeditorialteam RatethisArticle ★ ★ ★ ★ ★ Pleaseratethearticle Email Pleaseentervalidemailaddress Comments We'dlovetohearfromyou,pleaseenteryourcomments. Invalidemailaddress Submit ThankYouforyourfeedback! 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NatalieCampisi ForbesAdvisorStaff NatalieCampisiisaLosAngeles-basedreporterwhocoversmortgagesandhousingnewsforForbesAdvisor.Previously,shewastheseniormortgagereporterandanalystforBankrate.She’salsocoveredunemploymentonCapitolHillandnewsstoriesfortheTampaTribune.HerworkhasappearedinpublicationssuchasCNBC,TheChicagoTribune,andMSN. 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