The United States housing bubble has been up for debate for a while. While certain factors indicate that the market will crash, new data suggests that the current housing cycle is not even close to where it was when it peaked in 2005.
Observing the highs and lows of 2019, experts in the real estate industry have been discussing the possibility of a housing bubble this year. However, low mortgage rates and a record-low unemployment rate – both of which increase disposable income – indicate that the United States real estate market will remain strong.
Conversely, high prices, affordability issues and low inventory are pulling the market back. For instance, while rising home prices benefit sellers and real estate investors, they can also push away certain prospective buyers. But, when demand slows, so does year-over-year growth in real home prices.
Metrics Point to Steady Growth
The latest Case-Shiller home price data showed that year-over-year real home prices in the U.S. increased by just 0.3% nationally. Moreover, the 10-city composite is down 1.2% and the 20-city composite decreased by 0.7%. According to Logan Mohtashami in Housing Wire:
“The longer we stay at these levels, the better it is for everyone.”
Moreover, housing starts, purchase application data, existing home sales, new home sales, and the lack of cash-out refinancing are growing steadily and slowly. Dan North, chief economist at Euler Hermes North America, said in Forbes:
“Houses, in general, are probably overvalued, but not to a great degree, and certainly not as much as before the housing bubble peaked in 2005. At the current time, we see little of these excessive risks and, combined with only modest overvaluation, the probability of a damaging housing crash is limited.”
Despite certain factors, this cycle is still somewhat balanced. Overheated demand and a bubble possibility are questionable as data suggests the metrics of the current cycle years of 2012-2020 are nowhere near the lows of 2002-2005.
Real Home Prices Will Be Positive but Not Overheat
Although existing home sales decreased in 2019, monthly home supply actually increased at the beginning of the year before plummeting significantly later in the year. This happened while demand was surging.
Furthermore, homeowners are staying in their homes much longer and not choosing to move after five to seven years like they used to. An increase in housing tenure can also be translated into reduced inventory, which leads to a rise in nominal home prices. Mohtashami noted:
“We do not see a boom in cash-out refinancing or exotic, high-risk loans. Most crucial, homeowners today, in general, have excellent cash flow. They are qualified and comfortable homeowners with nested equity – especially those who bought homes from 2010-2016.”
Home prices will also be influenced as the country enters the large demographic patch of people aged 26 to 32. Considering the median age of the first-time homebuyer is 33, many people will soon be ready to purchase their first home, thus replacing the buyer demand. Following the trend of the previous year, mortgages will stay low, but are not expected to overheat as they did in 2013 or 2002-2005.
The combination of increasing home tenure, a large young demographic patch and low mortgage rates means home prices are expected to be positive in 2020. And, according to Mohtashami, nominal growth in home prices of more than 4.6% is not realistic for the long-term housing market.
Fortunately, real home price gains, existing home sales, new home sales, housing starts and purchase applications have been growing steadily and show no signs of an overheating market. Plus, other factors suggest that this cycle is experiencing slow growth, which is optimal for both the housing market and the economy. However, we must also keep in mind that these metrics may change in the future, so it remains to be seen what the market has in store.