For many people, the hardest part of buying a new home is the mortgage process. But in recent months, it doesn’t even get to that point for many prospective homebuyers. New homes that hit the market get caught up in bidding wars and snapped up by the highest offer — often in the form of cash.

According to the National Association of Realtors, all-cash home purchases currently make up a whopping 33% of the market.

So what’s going on with the housing market in the U.S., and what can homebuyers expect in the coming months? Here’s what you need to know.

Why Is the U.S. Housing Market Overheating?

In April 2021, the median sales price for existing homes increased by an eye-watering 19.1% year over year to $341,600. According to the National Association of Realtors, these are both record highs.

And while home sales were down slightly from March, they were still up 33.9% from April 2020. But why is this? According to experts, it all boils down to supply and demand. 

Since the end of the Great Recession, new home building hasn’t kept pace with the growth in population. What’s more, Millennials have reached an age and income level where they can afford their first or second home, which helps contribute to a shortage of new homes available for sale.

There’s also the massive impact of the coronavirus pandemic to consider. As shutdowns occurred in cities around the country and employees were encouraged to work from home, many Americans fled big cities to live in the suburbs or even rural areas. The record-low mortgage interest rates helped encourage this behavior by making it cheaper than ever to finance a home purchase. 

This quick rise in demand in the face of relatively low supply helped drive up home prices as prospective homebuyers bid against each other for their dream home or simply an investment property.

The pandemic also triggered an increase in new home building, with the industry seeing a 12% increase in new single-family homes being built. This increase in demand for materials, particularly lumber, caused the cost of lumber to spike, which, in turn, drove up the prices for new homes even higher.

The result is overvalued homes across the country. In April, Fitch Ratings estimated that national home prices are roughly 8.2% overvalued. 

Is This a Repeat of the 2008 Financial Crisis?

Home sales prices have increased in unprecedented ways in 2021, and it’s caused many to worry that the country will have another housing crisis similar to the one that occurred in 2006 and 2007 and helped trigger a global financial crisis.

But the factors that are driving the current housing situation are different from what we’ve experienced in the past.

The housing bubble that popped in the 2000s was largely driven by mortgage lenders offering loans to homebuyers who couldn’t afford them. The mortgage originators then sold these risky loans to bigger banks, which bundled them together and securitized them, which allowed investors to trade securities that were backed by the bundled mortgages. 

Because mortgage originators were no longer taking on the risk of the loans, lending standards decreased even more, and the real estate market boomed. But as home prices started declining and low adjustable interest rates were updated to match higher market rates, more than a fifth of these subprime mortgages were delinquent. 

As a result, while it is possible that the housing bubble will pop, or at least slow down, the reasons behind the bubble likely won’t trigger a wider economic collapse. Lenders are far more careful than they were during the previous housing bubble.

What’s Next?

Most real estate experts agree that the current housing bubble is very different from the last one the country experienced. A relatively slow recovery for unemployment and still-high unemployment will make it difficult for the market to continue to sustain the growth in home prices. 

The fact that home prices are far outpacing income growth is another sign that we’ll likely see a cooling-off in the coming months. That said, experts don’t anticipate a crash similar to the one experienced during the Great Recession.

That’s not to say there aren’t risks associated with the current market. At the beginning of the coronavirus pandemic, lawmakers provided homeowners with eligible loans to go into forbearance with no negative impact on their credit scores. 

By the beginning of May 2020, nearly 4 million homeowners were in forbearance. Now, that number has dwindled to 2.2 million, according to the Mortgage Bankers Association. Still, the biggest uncertainty for experts is when those people will be able to get back on a payment plan once the moratorium on foreclosures ends on June 30, 2021. 

If the market experiences a massive wave of foreclosures, it could wreak havoc on the market.

Currently, regulators are taking steps to prevent such a wave, with the Consumer Financial Protection Bureau proposing an extension through the end of 2021. This may give struggling homeowners more time to get back on their feet financially to avoid a potential crisis.

Additionally, rising mortgage interest rates could also help slow the appreciation in home prices by making it less affordable to buy. According to Freddie Mac, interest rates remain below 3% as of May 27, 2021, but if rates rebound, it could help to cool the market a little.

The Bottom Line

The housing market is hot, but there’s no need to panic. Most experts agree that, although the bubble may pop, or at least cool off a bit, we aren’t headed for another Great Recession. If you’re unsure of whether or not to buy a house in the near future, speak with a financial advisor to discuss whether it’s the right decision for you.

Note: Links to other websites or references to services or applications are provided as a convenience only. A link does not imply SouthEast Bank’s sponsorship or approval of any other site, service or application. SouthEast Bank does not control the content of these sites, services or applications.

Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.