Are Real Estate Home Prices Headed Toward A Bubble?
by Realtor Bobby Freeman
Talk of a real estate housing bubble is beginning to crop up as home prices have appreciated at a rapid pace this year. This is understandable since the appreciation of residential real estate is well above historic annual averages. According to the Federal Housing Finance Agency (FHFA), annual appreciation since 1991 has averaged 3.8%. Here are the latest 2020 appreciation numbers from three reliable sources:
FHFA: 7.8%
CoreLogic: 7.3%
Case-Shiller: 7%
It’s easy to jump to the conclusion that house appreciation is out of control in today’s market. However, we need to put these numbers into context first.
The COVID Impact on Home Prices
The pandemic caused many households to reconsider whether their current home still fulfills their lifestyle. Many homeowners now want larger yards that are both separate and private.
“Homebuyers now want home offices, gyms, and living rooms well-suited for video conferencing,” says Jennifer McCoy, Broker/Owner of McCoy-Freeman Real Estate serving all of Florida’s Space Coast.
“The historically low mortgage interest rates are allowing homeowners to be able to move up to a larger home that fits the amenities now required” says McCoy.
At the same time, concerns about the pandemic have caused many homeowners to put their plans to sell on hold.
In Brevard County, the inventory of single-family homes for sale decreased 46.4% over the past year in November. This amounted to only 1,375 homes for sale compared to 2,348 homes for sale this time last year.
More people buying and fewer people selling has caused home prices to escalate. However, with a vaccine on the horizon, more homeowners will be putting their houses on the market. This will better balance supply with demand and slow down the rapid appreciation.
That’s why major organizations in the housing industry are calling for much more moderate home appreciation next year. Here are the most recent forecasts for 2021:
National Association of Realtors: 4.5%
Freddie Mac: 2.6%
Fannie Mae: 2.1%
Mortgage Bankers Association: 2%
This Is Nothing Like 2006
Finally, let’s put to rest some of the concerns that today’s scenario is anything like what led up to the last housing crash. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains why this is nothing like 2006:
Such a frenzy of activity, reminiscent of 2006, raises questions about a bubble and the potential for a painful crash. The answer: There’s no comparison. Back in 2006, dubious adjustable-rate mortgages taxed many buyers’ budgets. Some loans didn’t even require income documentation. Today, buyers are taking out 30-year fixed-rate mortgages. Fourteen years ago, there were 3.8 million homes listed for sale, and now, inventory is only about 1.5 million homes.
Bottom Line
Most aspects of life have been anything but normal in 2020. That includes buying and selling real estate. High demand coupled with restricted supply has caused home prices to appreciate above historic levels. With the end of the health crisis insight, we should see price appreciation return to more normal levels next year.