By Mark Zandi

January 6, 2022 at 8:00 a.m. EST

House prices are sizzling. Not just in swanky neighborhoods in the nation’s big cities or in resort towns. Not just in the suburbs or exurbs. Not just in inner cities or in rural areas. Just about everywhere.

House prices were rising strongly before the pandemic, but since the pandemic hit they’ve been on a tear. The median existing house price — half of homes sold for more and half for less — has surged to more than $350,000, about double what it was a decade ago.

Just in the past year, the price for a typical home is up almost 20 percent. And in about one-fourth of the nation’s 400-plus metropolitan areas, prices have rocketed by more. Even in the mid-2000s just before that housing bubble burst, fewer than one-fifth of metropolitan areas had seen annual prices increase as much.

So, are we in another housing bubble?

No. Not yet. But I say this with less confidence than I did a year ago, and if current trends continue for another year, I won’t be saying it at all.

There are good reasons house prices are up a lot. First, a shout-out to the federal government’s yeoman efforts to shore up the housing market during the pandemic. This includes a foreclosure moratorium and forbearance on payments on government-backed mortgages, which have forestalled distressed home sales, typically at big discounts that weigh on house prices. There have been amazingly few foreclosures during the pandemic.

House prices have also been supercharged as mortgage rates declined to record lows. In no small part due to the Federal Reserve’s efforts, the rate on a typical 30-year fixed-rate mortgage loan fell below 3 percent at the start of the pandemic and has been hovering near there ever since.

For most of the economic expansion before the pandemic, rates were closer to 4 percent. And in the housing bubble they were about 6 percent. Since most home buyers purchase as much home as their mortgage payment and income will allow, lower mortgage rates quickly juice demand and house prices, particularly when there is a shortage of homes, as there is now.

This housing shortage had its beginnings in the bursting housing bubble and collapse in new home building. Builders have slowly ramped up construction since then, but even now the number of new homes is not sufficient to meet demand. The vacancy rate for homes for sale has never been lower and continues to decline. The housing shortfall is especially acute for lower-priced homes. More restrictive zoning since the financial crisis and much higher labor, lumber and other material costs have vexed the economics of building homes at lower price points. The chaos in global supply chains complicates home building even more.

Work-from-anywhere, set off by the pandemic, has further powered housing demand. Many apartment dwellers in the nation’s largest urban centers that were slammed hardest by the pandemic fled for the safety and bigger spaces of the suburbs, exurbs and smaller cities. Many bought homes and have been willing to pay much higher prices that look like bargains compared with house prices in the city.

Take New York City, where well over half a million more people have moved out than have moved in since the pandemic began. New Yorkers are buying homes in places like Atlanta, Austin, Orlando and Tampa. Similar numbers have left the Bay Area and Los Angeles for places like Boise, Idaho; Boulder, Colo.; Las Vegas; and Tucson.

New Yorkers and Californians accustomed to outsize house prices have viewed much lower prices in smaller communities as bargains, even though they are paying much more than any previous buyer has. House prices in these communities have gone parabolic.

Home-buying is also enjoying a demographic tail wind with the bulk of the large millennial generation now in their early 30s, an age when previous generations have purchased first homes. For economic and social reasons, the millennials may take a bit longer to become homeowners. They’ve been slower to strike out from their parents’ homes and start families. But single-family housing demand will continue to get a boost from this cohort through at least mid-decade.

House prices should be riding high, but they have risen so far so fast that they are increasingly disconnected from household incomes, apartment rents and construction costs. If prices consistently rise more quickly than incomes, owning a home ultimately becomes unaffordable. If prices get too far ahead of rents, it makes more financial sense to rent a home than buy it. And if prices outstrip the cost of constructing homes, builders have a strong incentive to put up more homes.

Based on these tried-and-true measures of house-price valuation, homes nationwide appear overvalued by as much as 15 percent, and in much of the South and West they are overvalued by more than 20 percent.

But while the housing market is overvalued, it’s not a bubble. That would happen if the market turned speculative with investors — particularly buyers who purchase homes looking to sell quickly for a profit — dominating the market. House flips — an arms-length sale within one year of the previous sale — have picked up in recent months but are still not a serious concern.

Much of the flipping is by investors purchasing older homes, particularly in less bubble-prone Northeast and Midwestern cities, renovating them, and then quickly selling. Moreover, unlike in the previous housing bubble, today’s housing investors are mostly large well-established companies that have longer-term investment horizons. They buy homes, fix them up and then rent them to families who can’t afford to buy, but want the lifestyle offered in a single-family home.

Nonetheless, it isn’t a stretch to think inherently over-optimistic flippers will find it tough to pass up what looks like easy money, become more emboldened and cause the overvalued housing market to cross to a bubble. They calculate that if they had purchased a home in some of the nation’s hottest housing markets a year ago, say Phoenix with a typical 20 percent down payment, and sold it today, they would have reaped a near crypto-like 150 percent return. Stock prices, which have had their own amazing run, are up only 30 percent over the same period. This financial arithmetic won’t work for very long, but it can work long enough to inflate a bubble.

This would be especially disconcerting if investors finance their purchases with more debt. Indeed, mortgage debt is increasing quickly. It is up at a near double-digit pace over the past year, the strongest growth since during the previous housing bubble. There are big differences between now and then, since today’s lending is mostly plain vanilla 30-year fixed rate mortgages, where borrowers’ credit history, income and appraised housing values are well documented. This is in contrast to the last bubble when adjustable rate loans were made to borrowers with low credit scores — remember the ubiquitous subprime two-year adjustable rate loan — and questionable, even fraudulent, borrower documentation.

Having said this, competition is heating up in the mortgage market, which in times past has driven lenders to ease their lending standards.

The script on house prices is still being written. The most graceful scenario is for prices to cool off, go more-or-less sideways, and allow incomes, rents and construction costs to catch up.

This seems likely if mortgage rates soon push modestly higher, weighing on housing demand and ultimately prices. While forecasting when rates will rise is an intrepid affair, it stands to reason they will rise as the pandemic recedes and the economy returns to full health, prompting the Federal Reserve to wind down its bond buying and increase short-term rates.

There will likely be some price declines in the most hyped-up parts of the housing market. Second- and vacation-home destinations and smaller and midsize cities that have enjoyed the biggest influx of work-from-anywhere households are most at risk once companies require employees to return to the office.

But the price declines won’t be broad-based. The stronger job market will forestall foreclosures and distressed sales, and the housing shortage will put a proverbial floor under prices in many communities.

Of course, a much darker scenario could unfold, in which house prices continue to quickly appreciate, speculation intensifies and a bubble inflates. This scenario doesn’t end well. House prices ultimately would experience a severe comeuppance with widespread price declines.

We should know soon which scenario will unfold.

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