How Long Is the Red-Hot Housing Market Expected to Last?

by Dana George | Updated July 19, 2021 - First published on May 31, 2021

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A man and woman standing with their arms around each other in front of their house with a For Sale sign behind them.

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With millions of Americans priced out of home buying, it's natural to wonder when the market will cool.

I've spent months trying to predict the future. I am wildly curious about what might happen with the housing market, and it seems I'm not alone. According to Google, the search question "When is the housing market going to crash" spiked 2,450% in March.

So, what can we expect from the housing market? Opinions vary. Here, I'll lay out some commonly held expert observations in hopes of getting a better idea of what lies ahead. Spoiler alert: While I can't offer a definitive answer, I can offer you signs to be on the lookout for.

The perfect storm

So much of what happens in life appears random. It's only when you look back later that you realize a combination of events changed everything, and today's housing market is the perfect example.

Event No. 1: COVID-19 caused us to look at our homes in a different way. Homes became offices, classrooms, and sanctuaries from the outside world. At a time when most economists expected the housing market to come to a screeching halt, buyers began to look for new homes to settle down in.

Event No. 2: Due to the pandemic, businesses got shuttered, and millions of Americans lost their jobs. To prevent a collapse of the economy, the Federal Reserve lowered the prime rate, and lenders lowered the rate at which they offered mortgage loans.

Event No. 3: At the same time, there were far more home buyers than inventory. Now that we were all sheltered in place, fewer Americans were interested in selling. Plus, some home builders -- not expecting high demand for new housing amid a global pandemic -- had laid off workers or shut down operations. Given the limited number of houses available, 39% of those sold went for more than the list price.

Event No. 4: The high price and relative scarcity of building materials, along with a shortage of skilled labor, added about $26,000 to the cost of building a new average-sized home. Because of that, some of the largest builders in the country slowed production, hoping the cost of doing business would stabilize. This slowdown made the housing shortage worse, leading to higher prices on existing properties.

These loosely related factors crashed into one another, creating a home-buying frenzy that has priced millions of average Americans out of the housing market and left around 60% of households unable to afford a median-priced new home, according to the National Association of Home Builders.

Knowing how the buying frenzy started helps us identify likely causes for a cool down.

What to look for

The thing about perfect storms is that they depend on everything coming together in a specific way. What if the Federal Reserve never lowered the prime rate, and mortgage lenders never decreased their rates? Without historically low rates, far fewer people would purchase homes. Fewer buyers would mean less demand. And less demand would lead to lower prices.

To predict what the future holds, we must consider which parts of the current equation are most likely to change.

Affordability

The adage "real estate is local" is true. While homes are still affordable in some areas of the country, they are widely out of reach in others. Nationally, home prices in March 2021 increased 11.3% compared to March 2020. The CoreLogic HPI Forecast predicts that prices will increase by another 3.5% by March 2022. The prices that have gone up most are at the low end of the market, meaning the number of first-time buyers is likely to decrease.

Fewer new buyers will likely lead to a lower number of buyers overall, a factor sure to slow the market down.

Interest rate

The interest rate is rising at a slow but steady pace. The slightest change in interest rates can price millions out of the housing market. According to calculations by the online real estate brokerage Redfin, when the interest rate moves from 2.75% to 3.25%, a homebuyer loses $23,250 in buying power. In other words, each upward tick of interest rate reduces the amount of mortgage for which a homebuyer qualifies. If you see rising interest rates, you can be sure it will impact the market.

Inventory

The lack of inventory is one of the primary forces behind today's competitive housing market. Right now, there are about half the number of homes listed for sale as were listed last winter. Competition has become fevered. If you hear of more homes hitting the market as vaccines get into arms and the pandemic gets under control, it's a good sign that prices will soften.

Confidence

There are several issues undermining public confidence in the housing market. One is concern over whether homes are overvalued, and another is that buyers risk paying more than a property is worth. A report from Fitch Ratings claims that prices are overvalued by 8.2% nationally. On a $300,000 home purchase, that's $24,600.

Finally, a March survey from Fannie Mae indicates that most people believe house prices will continue to rise. Due to that belief, the percentage of Americans who say now is a good time to buy a home dropped by 4%. The number of respondents who said it was a good time to sell a house also fell, likely because they are unsure whether they can afford to purchase a replacement home.

We know for sure that any one of these factors could change the housing landscape. Armed with that knowledge, we can wait and see what happens to individual components like the interest rate, inventory, and consumer confidence.

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