Some still believe the real estate industry is primed for a major reversal. Indeed, home prices are down this year, something that would’ve seemed almost inconceivable just a year ago. Is there a real estate bubble in the United States?
Well, probably not. While there are still many regional housing markets that are grossly overvalued from the pandemic-era buying frenzy, things are relatively solid on the whole. That is to say, on a wider scale, home prices generally haven’t fallen victim to baseless speculation on the same scale as in previous housing downturns — especially the 2008 housing crash.
Furthermore, the inventory of available homes in the U.S. remains drastically constrained. According to the National Association of Realtors (NAR), the U.S. has a 2.6 month supply of available homes, well below the ideal 6 to 7 month supply. Basic supply and demand tells us that the more pinched the home supply, the harder it is to see substantial changes to home prices, even despite a slip to demand.
“We simply don’t have enough inventory,” says NAR Chief Economist Lawrence Yun, “Will some markets see a price decline? Yes. [But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”
That said, heading further into the second quarter of the year, things may change both rapidly and unpredictably. Mortgage rates, which remain the single-most deterministic factor in housing demand, have climbed as high as 8% in the face of the Federal Reserve’s seemingly ceaseless rate hikes.
While mortgage rates have eased back down to the roughly 7% range, the story isn’t quite over. Projections are that the central bank may yet have at least one more hike in the tank this year. So, mortgage rates may be liable to go back up. This could have profound effects on housing demand in the country.
What Would a Real Estate Bubble Burst Look Like in 2023?
Currently, U.S. home prices are down about 3% from last year. While this can hardly be construed as a “bubble burst,” some areas have certainly experienced more brutal losses than others.
Indeed, as per NAR’s March data release, regions like the Northeast and West have largely fueled the wider drop in home prices. The median price in the Northeast is down almost 5% from last year. Meanwhile, the West is seeing a 5.6% slump from February 2022. For most housing economists, this comes as little surprise, as these regions enjoyed the greatest boom in prices during the pandemic.
This is relatively in-line with predictions from Rick Sharga, President and CEO of CJ Patrick Company:
“Formerly high-flying markets, like coastal California, and cities like Las Vegas, Phoenix and Austin may see double-digit price declines, especially at the high end of the market. On the other hand, markets with strong population and job growth, like North Carolina and Florida, may well see slight price increases.”
As has been the case for most of the past year, the future is largely in the Fed’s hands. If the central bank opts to pause its rate hikes this year, or even take a dovish pivot toward lowering interest rates, expect home prices and home sales to experience a swift recovery. On the flip side, rising interest rates combined with eventual macroeconomic deterioration could lead housing even deeper into its current rabbit hole.
Either way, 2023 isn’t 2008. Even though home prices may fall this year, it’s hard to consider a real estate “bubble burst” to be an accurate metaphor.
“We’re estimating about a 5% drop nationally,” Sharga told Forbes Advisor. “Some markets, believe it or not, will probably see prices continue to increase.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
