With home prices at a new record high and homes flying off the market in hours. The mania seems reminiscent of the run-up to the housing bubble in the mid-2000s—and we’ve all been told that what goes up eventually comes down.

However, according to experts, housing is likely to keep defying common sense. Experts say there’s no need to prepare for a crash landing similar to what happened in 2008 and 2009. Currently, the reason for the out-of-control prices is simply that there are many more buyers than there are properties for sale. Also, prices rise when there is more demand than supply. It is crazy, but welcome to the new normal.

Nationally, median home list prices shot up 17.2% year over year in April, to hit a new record high of $375,000, according to Realtor.com® data. Meanwhile, incomes haven’t risen as much.

  1. Over the next year or two, prices will keep rising but at a slower pace. The current climate of bidding wars will taper off and the ridiculously high offers over asking price will start to come down.
  2. Prices won’t necessarily return to their pre-pandemic levels. List prices are expected to keep rising to meet sale prices, but the annual increases won’t be as bad.
  3. Prices could drop by a significant amount if mortgage rates shot up quickly and a lot of homes flooded the market. The record-low rates have allowed buyers to purchase more pricey houses all while keeping monthly payments within budget. So, as the rates rise, buyers won’t be able to afford the higher prices. On turn, an increase in inventory would give buyers more options leading to less competition.

“As the pandemic winds down and the work-from-anywhere dynamic pulls back as office buildings reopen and interest rates normalize, that’s going to take the froth out of the market and may also result in corrections in some markets,” says Mark Zandi, chief economist at Moody’s Analytics.

Why isn’t the housing market on the verge of collapse?

The fast-rising prices and market mania may remind some of us of the days leading up to the last housing collapse. But the reasoning behind the last meltdown aren’t as present this time around.

  1. Today there are far more buyers than homes for sale.
  2. Currently, there isn’t enough new construction to meet demand and investors aren’t driving up prices.
  3. Bad mortgages—the key factor in the previous financial crisis—have mainly disappeared from the market. Thanks to new regulations, only the most qualified borrowers can get mortgages and the riskiest loans.
  4. The economy is improving and forbearance programs have helped keep homes from going into foreclosure. The high home prices should give even strapped owners a cushion, allowing them to sell their homes and potentially even walk away with a profit.

Could some folks overpay for homes that will lose value?

  1. Experts say most buyers shouldn’t worry. The lack of supply combined with the high demand should help keep home prices stable.
  2. According to experts, desirable suburbs with lots of amenities and short commutes to the bigger cities are expected to continue rising in value.
  3. Popular vacation spots and growing cities that are attracting good jobs are also expected to do well in the coming years.

Will the housing market ever settle down?

Mortgage interest rates are the key factor.

  1. When they hit record lows, decreasing below 3% on a 30-year fixed-rate mortgage for the first time, prices had room to spike without increasing a buyer’s monthly mortgage payment.
  2. If rates go up into the 4% or 5% range, many buyers wouldn’t be able to afford the monthly mortgage payments on the homes they want anymore. Thus, they could leave the market, decreasing demand.
  3. If rates were to dip, that would allow prices to continue moving upward.
  4. Economists don’t believe rates have room to go much lower.
  5. The market may cool off as the pandemic ends and people feel safe in cities and traveling again. This will take some pressure off—leading to, possibly, only single-digit price increases in the coming years.

If you have any other questions about the real estate market and specific local stats, I’m always a text, email, or phone call away! 717-496-7431 or timfisler@kw.com. Stay safe, and stay informed.