Housing Prices Start to Flatten- Will a Housing Bubble Follow?

As the market has progressively heated to a boiling point, most real estate experts swore up and down that the housing market wasn’t in a bubble. Mortgage interest rates were so low, in the unprecedented mid-2% range, that buyers could afford the inflated prices, they said. Lenders were no longer making bad mortgages that could trigger another foreclosure crisis. And this time around, a housing shortage that has reached crisis proportions has resulted in many more buyers than properties for sale—just the opposite of the 2007–08 pre-crash conditions. This market could support the frenzy, they explained.

As the market has progressively heated to a boiling point, most real estate experts swore up and down that the housing market wasn’t in a bubble. Mortgage interest rates were so low, in the unprecedented mid-2% range, that buyers could afford the inflated prices, they said. Lenders were no longer making bad mortgages that could trigger another foreclosure crisis. And this time around, a housing shortage that has reached crisis proportions has resulted in many more buyers than properties for sale—just the opposite of the 2007–08 pre-crash conditions. This market could support the frenzy, they explained. And that’s on top of what potential buyers are spending on everything else. Rents are up about 17% year over year, inflation is running at 8.5%, and gas prices rose about 40%. Many folks are simply tapped out.

How can the system handle skyrocketing home prices, mortgage rates, and rental prices simultaneously? Some believe it can’t. “We’re not in a housing bubble just yet—but we’re skating close to one if prices continue rising at the current pace,” says George Ratiu, manager of economic research at Realtor.com®. “Some markets will see a correction if mortgage rates continue to rise, in which sales will drop and prices will follow.

But “I don’t expect the market to see a huge crash or spike in foreclosures,” he adds. Ratiu anticipates prices could fall 5% to 15%, depending on the local real estate market. Areas with struggling economies without the good jobs needed to attract new residents, such as the Rust Belt, would likely see larger price declines. Prices are already tumbling in places like Toledo, OH, and Rochester, NY.

But buyers expecting some pricing relief will likely be disappointed. Even if prices do fall, homebuyers will still be saddled with higher monthly mortgage payments. Rates have risen so much, so quickly, that they will likely more than make up for lower prices, costing homebuyers even more money.

What will happen to home prices?

High mortgage rates haven’t pushed down prices, yet. Prices might even rise, at least initially, as buyers race to lock in properties before they’re stuck with even higher rates. That could cause them to make even larger offers to win bidding wars, which in turn, inspire sellers to raise prices.

Nationally, median list prices were up 15.3% in the week ending March 26 compared with last year However, many real estate experts predict the party might be coming to an end. “We have learned from history that prices can fall,” notes Hale. “The more important question is if it’s going to happen right now. And that’s hard to say.”

With much higher mortgage rates, “housing is going to have to adjust. It’s unclear if that will mean falling prices or just slowing price growth,” says Hale. Zandi believes prices will slow and even dip between 5% and 10% in the most overheated real estate markets.

“The declines are going to be in the parts of the country that got the most juiced up, like Boise, ID, and Phoenix, the Southeast and Florida, and over into Texas,” says Zandi. These are the places that locals are struggling to buy in, particularly as they compete against deep-pocketed investors.

“Those are markets that have seen the most stratospheric price gains, and that’s where we’ll see the most comeuppance,” says Zandi.

“The midtier markets may be the most affected as middle-class buyers are hurting from inflation and rising housing costs,” he adds. “The lower end of the market is likely to fare better as there just aren’t many affordable homes for sale. So those sales are expected to remain brisk.”