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Should you buy a home in the hottest market ever? Huge gains can’t continue, some experts warn

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The US real estate market is in an absolute tear. Month after month, prices break new records. The sellers are thrilled. While buyers can revel in mortgage rates close to historic lows, that’s about the only advantage to buying a property in this market.

If you are thinking of buying a home now, the surge in prices raises an obvious question: should you join the bidders who are pushing the prices ever higher?

Some, like Desmond Lachman, senior researcher at the American Enterprise Institute, urge caution. He says the Federal Reserve’s decision to cut interest rates during the coronavirus pandemic has inflated everything from home values ​​and stock prices to cryptocurrencies and collectibles.

“If you buy now, you would buy at the top,” Lachman says. “It’s not just the real estate market, but all of these other markets that are in danger of collapsing.”

Ken Johnson, real estate economist at Florida Atlantic University, is also reluctant about the direct trajectory of home values. While he expects any correction in home prices to be moderate, those who buy at the top of the market are unlikely to reap big returns, he warns.

“Trees don’t grow skyward and neither do house prices,” Johnson says. “We’re a long way from where we were at the peak of the last real estate cycle, but we have to be careful. Stepping away from a blatantly overpriced home may be the best thing buyers can do in this kind of market.

House prices are soaring

When the US economy stalled in the spring of 2020, many expected home values ​​to crash deeply. Instead, prices spiked to new highs and then continued to climb.

The 18.6% rise in nationwide home prices in June was the largest in over 30 years of S&P CoreLogic Case-Shiller data. (Figures for July are not yet available.) June marked the third consecutive month of record home price appreciation.

“The past few months have been extraordinary not only for the level of price gains, but also for the consistency of gains across the country,” said Craig J. Lazzara, Managing Director of S&P Dow Jones Indices.

The metropolitan areas of Boston, Charlotte, Cleveland, Dallas, Denver and Seattle all recorded their highest levels of price increases.

This is in stark contrast to the housing bubble of 2005-2007, when prices soared in coastal markets but remained low in many inland metropolitan areas.

What drives up house prices

Soaring house prices are largely a function of an imbalance between supply and demand. Construction has never returned to the levels seen before the Great Recession, putting a damper on supply. On the demand side, the maturing millennials mean millions of Americans are forming households.

HousingWire analyst Logan Mohtashami says there are more than 32 million Americans between the ages of 27 and 33. “This is the largest demographic patch on record in US history, and the median age of first-time buyers is 33,” he says.

For this reason alone, house prices are unlikely to fall, Mohtashami says. He points to other factors, such as the high credit scores of mortgage borrowers and the relatively strict guidelines of lenders.

Lachman is not so sure. He fears that the Fed is inflating a bubble. “It’s fun while they print money and everything goes up. But the question is, what happens when interest rates rise, ”Lachman says. “By keeping interest rates this low for so long, they’ve created a bubble of everything. It’s not just the housing market.

Most observers don’t expect a crash like the one the housing market experienced from 2008 to 2010. Homeowners have record levels of equity in their properties, making a foreclosure crisis unlikely.

What buyers can do

It’s a sellers’ market in almost every housing market in the United States. If you’re shopping for a home, here’s how you can avoid paying too much:

  • Breathe deeply. Such a hot market creates its own sense of urgency. Johnson suggests avoiding paying more than you think a house is worth – there will always be another house.
  • Take into account local population trends. Populations in Texas, Florida, Utah, and North Carolina are growing. But in some Rust Belt markets, populations are declining, a reality that is driving down demand for housing. Buying in a warm market gives you more convenience than buying in a place where the population is declining, Johnson says.
  • Shop hard for a mortgage. Buyers may not have a lot of bargaining power when it comes to bidding on homes, but you can shop hard for a home loan. Getting multiple loan deals can save you thousands of dollars over the life of the loan.
  • Watch out for bidding wars. It’s not easy to avoid multiple auction situations in today’s market, where buyers pay tens of thousands of dollars more than the list price just to get a home.
  • Get started in auctions with a plan. In the heat of the moment, it’s easy to dramatically increase your prize just for trying to win. Before you get into a bidding war, set a clear cap on how much you’re willing to bid for the property and stick to it.

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