Despite the overvaluation, there are no signs that the property market is in a bubble. (A bubble develops when there is speculation or when buyers buy homes with the sole intention of selling quickly for a profit, which is not the case today.) But stress lines appear and the housing market will cool.
The rise in home prices is staggering. Across the country, property prices rose double-digit over the past year, after a decade of solid price increases since the property market bottomed out after the financial crisis. In fact, the average price of existing homes – half the homes sold for more and the other for less – is approaching $ 350,000, nearly twice what it was a decade ago. Think about the return you would have earned if you had the courage to buy the average home on the lower end of the market after the financial crisis, say with a typical down payment of 20%. It comes to a return of around 560%. There are simply not enough new homes to meet demand and the vacancy rate for homes for sale has never been lower. Given the more restrictive zoning since the financial crisis and much higher labor and material costs recently, builders have been slow to build more houses, especially at lower prices. The rise in house prices is being driven by the collapse in fixed mortgage rates to record lows during the pandemic. They have risen slightly in the last few months, but are still below 3%, which makes them extremely attractive. Since most homebuyers buy as much home as their mortgage payment allows, lower mortgage rates quickly increase demand and home prices, especially when there is a home shortage. House prices are continuing to skyrocket from everywhere due to the pandemic-triggered phenomenon of work. This has resulted in housing households moving to suburbs, suburbs and smaller towns in the country's largest cities. New Yorkers and Californians, used to inflated house prices, viewed much lower prices in smaller communities as bargains, even though they paid much more than any other buyer before the pandemic also boosted housing and home prices. The moratorium on foreclosure and forbearance on government-sponsored mortgage and student loan payments have prevented the sale of distressed homes, which are usually sold at large discounts, dragging down house prices.
Stress lines begin to show
However, stress lines are emerging on the housing market. Home prices have risen so quickly that they are overvalued. According to my analysis, house prices across the country appear roughly 10-15% overvalued when comparing price-to-income or price-to-rent ratios to their long-term historical averages. Some markets, especially in the south and west, are seriously overvalued – by more than 20%. Overvalued real estate markets are susceptible to a significant price correction when mortgage rates eventually rise. And they will. The Federal Reserve expects the economy to recover quickly and signals that it will soon begin normalizing interest rates. In addition, working from anywhere is likely to be a fundamental shift in the way we live and work, but it will also relax in part as companies ask their employees to come back to the office. And the moratorium on foreclosure and deferral of mortgage and student loans will expire in the coming weeks.
The demand for housing will therefore weaken. House prices will adjust. Not that there will be a large-scale decline in house prices; that still seems like a minor threat. This would require a significant increase in mortgage defaults and distressed sales, which is unlikely given the improving labor market and generally tough mortgage lending standards since the financial crisis.
In addition, the real estate market is not in a bubble. Unlike the housing bubble we saw before the financial crisis, house flips, defined as a sale within a year of the previous sale, remain low according to my analysis. And a lot of what happens is investors buy older homes, especially in older cities in the Northeast and Midwest, renovate them, and then sell them quickly.
But the house price hikes will certainly cool off a lot. There may even be modest price declines in the most hyped high-end areas of the housing market, in second and holiday home locations, and in smaller and medium-sized cities, which have seen the greatest influx of work from anywhere in households. And while homeowners are generally better financially than renters, homeowners shouldn't expect the oversized returns they have made in the last decade to repeat themselves anywhere in the next decade.
source https://seapointrealtors.com/2021/07/30/opinion-housing-demand-is-about-to-weaken-heres-why/
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