Fed economists warn of 'brewing US housing bubble' as home values continue to soar

As home price appreciation continues to balloon at unforeseen levels, some prospective buyers may be worried about an impending housing market crash. Of concern, new research from the Federal Reserve Bank of Dallas indicates early signs of a "brewing U.S. housing bubble."

"Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s," the Fed economists said. 

The report's authors point to a number of economic indicators that suggest unsustainable home price growth. In particular, the price-to-rent ratio and price-to-income ratio are becoming "increasingly out of step" with market fundamentals. 

Dallas Fed economists blame a widespread belief among consumers that rapid price growth will continue, putting pressure on some homebuyers to purchase a home now with the expectation that home values will soar further. It's a "self-fulfilling mechanism" that may be driving prices higher than real home values.

That's not to say that house price appreciation is wholly overvalued — higher construction costs, supply chain disruptions, relatively low borrowing costs and rising disposable incomes have sustained real price gains. And fortunately, the economists don't expect that a housing correction would be as consequential as the 2008 housing crash that led to a global financial crisis. 

"Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom," the authors said.

Keep reading to learn more housing market predictions from economists, so you can make an informed homebuying decision. If you're considering buying a home or refinancing your current mortgage, you can compare mortgage purchase and refinance rates on Credible for free without impacting your credit score.

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Economist: Housing market headed for ‘substantial downshift’ 

The Fed's concerns are echoed by Ian Shepherdson, chief economist at Pantheon Macroeconomics. He projects that existing home sales will drop roughly 25% by the end of summer due to decreased mortgage demand and rising interest rates. The average 30-year mortgage rate peaked to 4.67% on March 31, Freddie Mac data shows, which is the highest rates have been since 2018.

"The housing market is in the early stages of a substantial downshift in activity, which will trigger a steep decline in the rate of increase of home prices, starting perhaps as soon as the spring," Shepherdson said in a recent report.

Shepherdson estimates that monthly mortgage payments for median-priced homes have surged by $400 since September, which will continue to put pressure on new buyers as mortgage rates continue to rise. This is in line with research from the Mortgage Bankers Association (MBA), which found that new mortgage payments rose 26% annually in February.

"That’s a huge increase, even for households sitting on savings accumulated during the pandemic — a one-time increase in savings can’t finance an increase in mortgage payments for the next 30 years — and it will push demand down a good deal further," he said.

While this may be disheartening news for buyers, it's not necessarily bad for homeowners who are sitting on mountains of untapped equity. Home price appreciation may give some consumers the opportunity to make home improvements or pay off higher-interest debt through cash-out mortgage refinancing. You can get in touch with a loan expert at Credible to learn more about mortgage refinancing.

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Some real estate experts see signs of a ‘healthy market’

Not all economists agree that high home value appreciation signals impending doom for the housing market. Mike Hardy, a mortgage consultant and managing partner of Churchill Mortgage, said that the current real estate market is "the complete opposite" of a housing bubble.

"The current housing industry is seeing a period of continued growth and the low inventory we are experiencing signals a healthy market," Hardy said. "The only ones putting themselves at risk are the ones sitting on the sidelines missing out."

What's more, some experts predict that mortgage interest rates will continue to rise further, putting less constraint on the market. Melissa Cohn, an executive mortgage banker based in New York, said that while real estate professionals and buyers alike were "stunned" by sudden mortgage rate increases during recent weeks, she expects rates to surpass 5% by the end of 2022.

"The sentiment in the market is that bond yields are going to continue to rise, and as a result of that, mortgage rates are going to continue to rise," Cohn said.

Rising mortgage rates may alleviate — but not eliminate — buyer demand, according to Denver-based mortgage advisor Nicole Rueth: "This could give the market a chance to balance out a tiny bit for buyers."

If you're considering purchasing a home in the current rate environment, it's important to compare offers across multiple mortgage lenders to find the lowest rate possible for your financial situation. You can browse current mortgage rates in the table below. Then, visit Credible to see your estimated rate for free without impacting your credit score.

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