As the pandemic housing boom, which has driven up U.S. home prices by 42 percent over the past two years, comes to an end, it raises the question: Does Shiller think we’re in another housing bubble?
Shiller talked to Yahoo Finance on Sunday. He told the outlet that he still thinks the U.S. housing market is headed for trouble.
“Home prices haven’t gone down since the recession of 2007–2009. “Right now, it looks like things are almost as bad,” Shiller said. “Sales of already-built homes are down. The number of permits is down. There are a lot of signs that something will happen. It might not be a big deal, but it’s time to think about it.”
Shiller says it seems likely that home prices will go down.
This is now in backwardation, and home prices are expected to drop by about 10% by 2024 or 2025. Shiller told Yahoo Finance that was a good guess. “Risks are higher right now for people who want to buy a house.”
Even though national home prices rarely go down, it does happen sometimes. It happened in the early 1980s and early 1990s, but mostly in the years after the housing bust of 2008. Shiller says, though, that drops of 10 percent are very rare. Prices have only been cut that much during the Great Depression and the Great Recession. If that 10 percent drop in home prices happens, the widespread housing boom will probably be known as the widespread housing bubble.
A housing bubble is made up of three main parts.
“Speculation” is the first part. In a typical housing bubble, a lot of investors and speculators would rush in to chase the rising home prices. We’ve seen a lot of that over the past two years. Not only did people who buy and sell homes again, but investors also bought a record number of single-family homes. Even people who build homes got carried away. So many people wanted to buy that builders decided they didn’t have to wait for people to buy. The industry calls these homes “spec homes,” which stands for “speculative homes,” and a record number of them are being built right now.
“Overvaluation” is the second part. In a housing bubble, home prices go up by a lot more than what incomes could have supported in the past. We’ve already gotten there. Researchers at CoreLogic, Moody’s Analytics, and Florida Atlantic University all found the same thing in their own studies.
We still don’t have the third part, which is a bubble that bursts. It’s not a housing bubble if home prices don’t drop.
Shiller thinks it’s possible for home prices to drop by more than 10%, but most people in the industry don’t agree. Home prices are likely to go up over the next year. This is what the Mortgage Bankers Association, Fannie Mae, Freddie Mac, CoreLogic, and Zillow’s forecast models say will happen. At the same time, John Burns Real Estate Consulting, Capital Economics, Zelman & Associates, and Zonda are all predicting small drops in home prices.
Why do some people in the industry think it’s unlikely that home prices will go down? First, the country made it illegal to give subprime mortgages, which crashed the market ten years ago. Not only that, but this time around, homeowners have less debt. In 2007, 7.2% of the U.S.’s disposable income went to paying for mortgage debt service. Now it’s just 3.8 percent .
Some firms won’t be bearish on home prices for another reason: there aren’t enough homes on the market.
“Our economists have been saying this for a while: the market is slowing down, but homes aren’t going to get cheaper any time soon. Compared to the fast start to the year, price growth will slow or even out, but the lack of supply is a fundamental force that will keep prices high” Will Lemke, Zillow’s spokesperson, said.
Bears on the housing market think that companies like Zillow aren’t taking into account the risk of an oversupply. From their point of view, there is a chance that in 2023, Atlanta, Austin, and Dallas will have too many homes on the market because of all the spec homes that are being built. If that happens, it would cause home prices to go down.
“Housing is thought to be structurally undersupplied, but cyclical factors mean that there could be more homes on the market than buyers in the near future. I think everyone is aware that an increase in inventory may come at a bad time in some markets, when demand has slowed down “Ali Wolf, chief economist at Zonda. “We don’t think that home prices can only go up… Our prediction is that housing prices will go down by a small amount.”
