Major Report States The Housing Bubble is About to Deflate

House prices increased by around 17% in 2022, even though everything going on in the wider economy suggested the exact opposite should happen.

This has left many people wondering if we’re in the middle of a housing bubble set to burst any minute now. Are we due a correction? A recent report from CoreLogic suggests this could be the case, but the experts haven’t exactly reached a consensus. 

Will The Housing Bubble Deflate?

Where Things Stand in 2022

Everyone scraping together the funds to buy a house in 2020 looked on in panic as the markets seemed to defy all expectations.

House prices rose higher and higher, even as the world was in peril and many jobs were hanging by a thread.

Those who felt reluctant to jump right in felt more pressured than ever to get involved while the federal funds rate (and therefore mortgage rates) still remained low, eager to snap up houses out of the fear that prices would continue to rise at the same exponential rates.

Fast forward to 2022, and we’re finally seeing some signs that things are changing. The Fed has finally changed its approach by rising rates (up to 0.75% in May 2022), resulting in mortgage rates rising.

The average interest rate for a 20-year mortgage is now 5.4% — relatively low historically, but above the past few years. Mortgages are now more expensive to buyers, which you’d expect to reduce demand.

Along with other economic conditions, like the cost of living crisis and uncertainty related to geopolitical tensions, many we are due a correction in real estate prices, some are predicting a housing market crash.

After all, house prices can’t keep skyrocketing if there’s nobody left who can afford to buy them. Plus, as the government strives to get inflation under control, fixing the housing market would make a huge difference.

The CoreLogic Report

Is the panic and FOMO from the pandemic finally beginning to subside, making way for a correction? One organization thinks so.

CoreLogic, a company focused on real estate research, is constantly trying to understand and analyze trends in the housing market. And its most recent report bears good news for struggling first-time buyers, as it’s predicting slower growth.

Although CoreLogic doesn’t think prices will fall any time soon, it does think growth will start to slow; more specifically, it’s predicting growth at a rate of just 5% in 2022.

This might not sound like something to celebrate at first; especially considering it’s impossible to increase your savings by the same amount if you’re relying on high-yield accounts.

However, considering the rate of inflation in the US right now is around 8%, house prices rising by 5% sounds fairly reasonable. 

For some perspective, house prices increased by 19% between January 2021 and January 2022. If CoreLogic’s predictions are close to the truth, it would be a major game-changer.

CoreLogic reached this conclusion by focusing on whether the average person has enough money to buy a home where they live, comparing average incomes in different areas with the house prices in those areas.

It found that housing was overvalued in 65% of its regions, meaning the average person was outpriced by the housing market. The report also accounted for factors like consumer confidence, unemployment predictions, and debt-to-income ratios.

But is there any truth to this? It’s early in the year to say, but there’s some evidence backing up their prediction. 2022 has seen mortgage applications drop by 10.6%, and there’s also less competition between homebuyers, with fewer bidding wars for properties taking place.

Regional Variations

It’s worth pointing out that not all regions of the US (or even all types of houses) are likely to rise at the same rate. The CoreLogic report surveyed 400 different metropolitan areas, and they didn’t all have the same results. 

The areas most likely to experience drops in house prices included Bend in Oregon, Lake Havasu City in Arizona, and Bridgeport in Connecticut. Meanwhile, 26% of areas remain “normal” or “undervalued.”

Then there were the non-metropolitan areas that didn’t even get a look in.

It’s tough to make predictions for the US as a whole when different regions may have very different factors at play. For instance, we saw many people moving from cities to the countryside during the pandemic — and now, many of them want to move back.

Plus, urban areas like New York have always experienced faster price growth than quiet, rural parts of the country.

The Other Side of the Story

Although the CoreLogic report will give hope to many, it’s unfortunately in the minority for predicting a correction in the housing market.

Most other experts believe house prices will continue increasing for the foreseeable future, maybe even in double digits. For instance, Zillow predicts 14.9% growth over the next year.

There are a few reasons why this could be the case. For one, there’s a limited inventory of housing stock. So even if demand decreases, it might not be enough to swing things in the opposite direction.

Also, although house prices and average incomes are now starting to become out of whack, it’s also true that a large proportion of first-time buyers (around 52%) admit to getting help from family members. T

hese people could effectively continue to prop the market up, even if they technically couldn’t afford a home with their own income and savings.

Plus, not everyone buying a property is a first-time buyer or even a local — many are investors or second-home buyers from other parts of the US.

This makes it tricky to claim we’re in a “bubble” based on affordability alone.

Where Does this Leave Homebuyers?

It’s not hard to make a case for why we could be in a housing bubble — property is now unaffordable to an increasing number of Americans, and with the cost of living and mortgage rates rising, that’s not going to change any time soon.

But while most agree property prices won’t fall any time soon, CoreLogic’s report at least gives some hope that the market is stabilizing. 

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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has investments in real estate.

This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.

Featured image credit: Shutterstock.

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