Since last summer, the housing market has been running at breakneck speed. In housing markets across the country, including here in Virginia, homes are selling incredibly fast, multiple offers and bidding wars have become the norm, and the housing shortage is getting even more severe. The Case Shiller index, which is a measure of national home prices, posted its highest level since 2006. Median prices in Virginia have been rising at near-double digit rates for eight months.
The last time the housing market looked this frenzied was 2005 to 2007.
But this housing market is much different than the one we had 15 years ago. The underlying fundamentals of strong, demographically driven demand and extremely low inventory are pushing prices up. A housing bubble occurs when prices escalate beyond what can be explained by the underlying fundamentals.
While we are not in a traditional housing bubble, the dramatic housing market of the past eight months cannot be sustained over the long term. There are at least three reasons to expect the market will cool down:
- Eventually, new construction will begin to accelerate and add to the inventory. Right now, Freddie Mac has estimated that we have a 8 million housing shortfall. New construction will reduce that shortfall—a little—which will ease the demand-supply balance. A little.
- Mortgage rates will rise slightly which could cool demand. While it is likely that mortgage rates will remain at historically low levels, certainly under 4% through 2021, a slight increase could push marginal home buyers out of the market.
- The most likely reason we’ll see a slowdown is affordability. Rising home prices will put homeownership out of reach for some segments of the population, even if rates don’t rise. As a result, some prospective home buyers are deciding to put off buying a home altogether.
Information for this article was provided by Dr. Lisa Sturtevant, Chief Economist of the Virginia Association of REALTORS®