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Judging by news reports and opinion pieces in trade publications and mainstream media, the risk of a housing bubble probably ranks as the top  concern of many economists and real estate industry executives today. But fear of resurgent inflation is a close second.  Home prices and a housing shortage are feeding the bubble fears, as we’ve discussed before; consumer prices and an increasingly rocky labor market recovery are creating the inflation jitters.

Is the housing boom creating a dangerous bubble?  In every boom-and-bust real estate cycle – and there have been a lot of them – experts have suggested and consumers have believed that the boom they were seeing, unlike all the others, would not be followed by a decline.  And every boom-bust cycle in the past has proven them wrong. 

Reports on housing market conditions during the past year have chronicled the disconnect between an economy hobbled by the pandemic and a housing market that seems to exist in an alternate universe, seemingly unaffected by lockdowns, job losses, and economic uncertainty. 

The housing market is crazy!  More than one industry professional has reached that conclusion, watching trends that seem inconsistent, if not contradictory. 

Mortgage rates are rising, yet homebuyer demand remains strong; sales are slowing, but prices are soaring;  bidding wars are erupting in many areas, even as experts warn that first-time buyers are being priced out of the market   Mortgage origination volume is breaking records, but credit standards are tightening. 

How can all of these trends exist simultaneously?    The short answer:  They may be inconsistent, but they are intertwined. The underlying trend that links the others is a chronic inventory shortage that is pushing home prices skyward and spurring frenzied competition for scarce listings that pushes prices even higher.  Recent reports illustrate the interplay and impacts of these market dynamics. 

Shrinking Inventories

Buyers seeking existing homes for sale found about a million of them available at the end of February – almost 30 percent fewer than in the same month a year ago and the smallest number of listings the National Association of Realtors (NAR) has ever recorded.   Black Knight, similarly, reported that its new listing volume declined by 16 percent in January and by 21 percent in February, while Redfin calculated that its March listings declined by 40 percent year-over-year. 

Experts consider a six months’ supply of homes to represent a healthy balance between buyers and sellers; the two month’s supply of existing homes  in February was far below that. The new home market was a little better, with an estimated 4.8 month’s supply.

Industry experts had been predicting – or hoping – that spring would bring an influx of new homes, but that hasn’t been the case – at least, not yet.  Uncertain  of their ability to find a replacement home in a tight market, and deterred by rising purchase prices,  many sellers are choosing to upgrade their existing homes rather than selling them, starving the market of the listings it needs.  New construction has increased, but not nearly fast enough to close the gap.

“Any hopes of 2021 bringing an influx of homes to the market and lessening pressure on prices appear to be dashed for now,” Ben Graboske, data and analytics president for Black Knight, told Housing Wire.

Price Pressures

When demand exceeds supply, prices rise.  That economic law of gravity is playing out big time in the housing market.  Redfin reports that nearly half of the homes that went under contract in March had an accepted offer within a week and more than 40 percent sold for more than their list price. Asking prices of newly listed homes increased by 14 percent,  while the median sales price (based on Redfin’s analysis of more than 400 metropolitan areas) increased to $335,613, up 17 percent year-over-year and a record high. 

Home Sales

Home sales have been following an upward trend for most of the past year, seemingly detached from the pandemic’s drag on other sectors of the economy.  But there have been recent indications that rising prices, sparse listings and rising interest rates may be creating something of an economic reality check. 

Sales of existing homes declined by 6.6 percent in February.  That decline, steeper than the 3 percent dip analysts had expected, reversed back-to-back gains in December and January, but still beat the year-ago pace by more than 9 percent.

Lawrence Yun, the NAR’s chief economist, blamed the inventory shortage, noting that despite the February dip, “the market is still outperforming pre-pandemic levels." He predicts that pent-up demand and an improving economy, buoyed by the successful COVID vaccination efforts, will push home sales this year above last year’s total. 

"With more COVID-19 vaccinations being distributed and available to larger shares of the population, the nation is on the cusp of returning to a sense of normalcy," Yun told  Mortgage News Daily. "Many Americans have been saving money,” he noted, “and there's a strong possibility that once the country fully reopens, those reserves will be unleashed on the economy.”

Struggles Ahead?

Yun’s optimism may prove to be justified, but the NAR’s Pending Sales index suggests that the market may be struggling, at least in the next month or two.  Pending sales plummeted in February, declining by 10.6 percent compared with January and by 0.5 percent compared with the same month last year – the first year-over-year decline for the index in eight months.  Analysts had expected a dip, but a much smaller one. 

New home sales also suffered in February, falling by more than 18 percent from a strong performance in January, when sales increased by almost 20 percent year-over year.  Buyer demand was strong enough, however, to push February sales up by more than 8  percent year-over-year.  Most analysts agree that weaker sales reflect the combined impacts of limited inventories, rising prices and higher mortgage rates, which have recently begun to rise from year-long record lows.

Encouraged by sustained buyer demand, home builders have been ramping up the new construction pace, but rising building costs, shortages of labor and buildable lots, and builder concerns about getting too far ahead of demand are exerting some restraint. 

Single-family housing starts in February declined by 8.5 percent compared with January and beat the year-ago pace by less than 1 percent.  Single family starts for January and February combined were more than 64 percent higher year-over year, the National Association of Home  Builders Reports. 

But the number of single-family homes  permitted on which construction has not begun has increased by more than 36 percent, as the rising cost of building materials has forced some builders to delay approved projects,  Robert Dietz, the NAHB’s chief economist, notes in a recent report.  He expects new home construction activity to increase this year, “but at a slower rate, as housing affordability is challenged by higher mortgage rates and rising construction costs.”

 Mortgage Credit

Rising home prices are forcing buyers to obtain larger mortgages, but making lenders more cautious about approving the loans.  As a result, although loan production volumes have been increasing, the availability of mortgage credit – has sunk close to its lowest level since 2014, the Mortgage Bankers of America reports.

“Lenders who were comfortable offering mortgages of $300,000 or $320,000 to borrowers with good-but-not-great credit histories might not be willing to lend the $350,000 or more now required to buy the same property,” the Wall Street Journal reported recently.

Facing a struggle to find a home and then another struggle to qualify for the mortgage they need to buy it, some buyers are simply giving up, Daryl Fairweather, chief economist for Redfin, notes in a recent report.  “Some have reached their limit on bidding wars and soaring prices.  Add to the mix a dwindling number of homes for sale. Rising mortgage rates [and stricter lending requirements], and the typical family that is searching for an affordable house may have missed the boat.”

The December employment report was a good news-bad news-good news story. The good news:  Employers added nearly 50,000 jobs and the unemployment rate fell, after remaining essentially flat for the previous two months.