This drop in mortgage rates almost completely offsets the rise in home prices according to a recent analysis by the Fed. Mortgage rates fell 88 basis points during this year as well from 3.62% in January 2020 to 2.74% in January 2021 per Freddie Mac. According to the Case-Shiller index, home prices grew more than 11% in January from one year earlier, which is definitely more than wages increased, but that's not the whole picture. “The current market doesn’t meet the definition of a bubble yet,” says Marr, “At least not nationally or in most places. annual GDP according to the National Association Of Home Builders.
So does the current national housing market meet the definition of a “bubble”? And more importantly, are buyers getting in on the current housing gold rush who are wondering, “Should I buy a house right now?” risking being trapped in another real estate valuation crash?Īccording to Redfin’s Marr, not quite yet-which is good news for still prospective homebuyers as well as for the overall economy since housing and its side industries like home renovation and improvement account for an average of 15%-18% of U.S. Robert Shiller said it best: ‘A bubble is a kind of social epidemic-a period of feedback where price increases generate enthusiasm among investors, who then bid up prices more, and then it feeds back again and again until prices get too high’.”
WHEN DID HOUSING BUBBLE EXPLODE IN GREAT RECESSION DRIVER
“A real estate bubble occurs when home prices escalate beyond what can explained by the fundamentals, like mortgage rates, population growth, or household income growth,” explains Taylor Marr, Lead Economist for real estate website Redfin, “When expectations of price increases become the driver of price increases themselves instead of fundamentals that creates its own feedback loop. If the current real estate market contracts or collapses what does that mean for the fragile. Then, there are other externalizing factors that don’t get the headlines but are also moving the needle, like technology-including online listing platforms, digital mortgage approvals, and virtual closings-which has fast-forwarded the speed at which homes are marketed and sold, particularly during the recent pandemic, in turn artificially hastening the pace at which demand is outstripping supply. This has created a “shadow inventory” of millions of homes that never hit the market because it makes more financial sense for owners to hold than sell as long as prices continue to outpace carrying costs (which in most market cases they still do). According to the Mortgage Bankers’ Association, 2.5 million mortgages, or 4.96% of all outstanding residential loans, also are still in forbearance, as wealthy buyers continue to snatch up second and third homes (or more) as investments. Mortgage interest rates have stayed at record lows through three successive Presidential Administrations, as the Dow Jones, NASDAQ, and S&P 500 have nearly tripled during the same period.
On the demand side, a dozen years of bullish fiscal policy have just added more combustion to the fire.
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