Are Home Prices Headed Toward Bubble Territory?
Appfolio Websites • December 9, 2020
Are Home Prices Headed Toward Bubble Territory?
Talk of a housing bubble is beginning to crop up as home prices have appreciated at a rapid pace this year. This is understandable since the appreciation of residential real estate is well above historic annual averages. According to the Federal Housing Finance Agency (FHFA), annual appreciation since 1991 has averaged 3.8%. Here are the latest 2020 appreciation numbers from three reliable sources:
- FHFA: 7.8%
- CoreLogic: 7.3%
- Case-Shiller: 7%
It’s easy to jump to the conclusion that house appreciation is out of control in today’s market. However, we need to put these numbers into context first.
Inflation and the Comeback from the Housing Crash
Following the housing crash, home values depreciated dramatically from 2007-2011. Values are still recovering from that unusually long period of falling prices. We must also realize that normal inflation has had an impact.
Bill McBride, the founder of the well-respected Calculated Risk blog, recently summed it up this way:
“It has been over fourteen years since the bubble peak. In the Case-Shiller release today, the seasonally adjusted National Index, was reported as being 22.2% above the previous bubble peak. However, in real terms (adjusted for inflation), the National index is still about 2% below the bubble peak…As an example, if a house price was $200,000 in January 2000, the price would be close to $291,000 today adjusted for inflation.”
The COVID Impact on Home Prices
The pandemic caused many households to reconsider whether their current home still fulfills their lifestyle. Many homeowners now want larger yards that are both separate and private.
Their needs on the inside of the home have changed too. People now want home offices, gyms, and living rooms well-suited for video conferencing. Barbara Ballinger, a freelance writer and the author of several books on real estate, recently wrote:
“While homeowners continue to want their outdoor spaces that offer a safe retreat, that appeal has shifted into other parts of the home, coupling comfort with function. In other words, homeowners want amenities for work and leisure, and they plan to enjoy them long after the pandemic.”
At the same time, concerns about the pandemic have caused many homeowners to put their plans to sell on hold. Realtor.com just released their November Monthly Housing Market Trends Report. It explains:
“Nationally, the inventory of homes for sale decreased 39.2% over the past year in November…This amounted to 490,000 fewer homes for sale compared to November of last year.”
More people buying and fewer people selling has caused home prices to escalate. However, with a vaccine on the horizon, more homeowners will be putting their houses on the market. This will better balance supply with demand and slow down the rapid appreciation.
That’s why major organizations in the housing industry are calling for much more moderate home appreciation next year. Here are the most recent forecasts for 2021:
- National Association of Realtors: 4.5%
- Freddie Mac: 2.6%
- Fannie Mae: 2.1%
- Mortgage Bankers Association: 2%
This Is Nothing Like 2006
Finally, let’s put to rest some of the concerns that today’s scenario is anything like what led up to the last housing crash. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains why this is nothing like 2006:
“Such a frenzy of activity, reminiscent of 2006, raises questions about a bubble and the potential for a painful crash. The answer: There’s no comparison. Back in 2006, dubious adjustable-rate mortgages taxed many buyers’ budgets. Some loans didn’t even require income documentation. Today, buyers are taking out 30-year fixed-rate mortgages. Fourteen years ago, there were 3.8 million homes listed for sale, and home builders were putting up about 2 million new units. Now, inventory is only about 1.5 million homes, and home builders are underproducing relative to historical averages.”
Bottom Line
Most aspects of life have been anything but normal in 2020. That includes buying and selling real estate. High demand coupled with restricted supply has caused home prices to appreciate above historic levels. With the end of the health crisis in sight, we will see price appreciation return to more normal levels next year.
Share this post
Thinking About Renting Your House Instead of Selling? Read This First. If your house is on the market but you haven’t gotten any offers you’re comfortable with, you may be wondering: what do I do if it doesn’t sell? And for a growing number of homeowners, that’s turning into a new dilemma: should I just rent it instead? There’s a term for this in the industry, and it’s called an accidental landlord . Here’s how Yahoo Finance defines it: “These ‘accidental landlords’ are homeowners who tried to sell but couldn’t fetch the price they wanted — and instead have decided to rent out their homes until conditions improve.” Why This Is Happening More Often Right Now And right now, the number of homeowners turning into accidental landlords is rising. Business Insider explains why: “While there have always been accidental landlords . . . an era of middling home sales brought on by a steep rise in borrowing rates — is minting a new wave of reluctant rental owners." Basically, sales have slowed down as buyers struggle with today’s affordability challenges. And that’s leaving some homeowners with listings that sit and go stale. And if they don't want to drop their price to try to appeal to buyers, they may rent instead. But here’s the thing you need to remember if renting your house has crossed your mind. Becoming a landlord wasn’t your original plan, and there’s probably a reason for that. It comes with a lot more responsibility (and risk) than most people expect. So, if you find yourself toying with that option, ask yourself these questions first: 1. Does Your House Have Potential as a Profitable Rental? Just because you can rent it doesn’t mean you should. For example: Are you moving out of state? Managing maintenance from far away isn’t easy. Does the home need repairs before it’s rental-ready? And do you have the time or the funds for that? Is your neighborhood one that typically attracts renters, and would your house be profitable as one? If any of those give you pause, it’s a sign selling might be the better move. 2. Are You Ready To Be a Landlord? On paper, renting sounds like easy passive income. In reality, it often looks more like this: Midnight calls about clogged toilets or broken air conditioners Chasing down missed rent payments Damage you’ll have to fix between tenants As Redfin notes: “Landlords have to fix things like broken pipes, defunct HVAC systems, and structural damage, among other essential repairs. If you don’t have a few thousand dollars on hand to take care of these repairs, you could end up in a bind.” 3. Have You Thought Through the True Costs? According to Bankrate, here are just a few of the hidden costs that come with renting out your home: A higher insurance premium (landlord insurance typically costs about 25% more) Management fees (if you use a property manager, they typically charge around 10% of the rent) Maintenance and advertising to find tenants Gaps between tenants, where you cover the mortgage without rental income coming in All of that adds up, fast. While renting can be a smart move for the right person with the right house, if you’re only considering it because your listing didn’t get traction, there may be a better solution: talking to your current agent and revisiting the pricing strategy on your house first. With their advice you can rework your strategy, relaunch at the right price, and attract real buyers to make the sale happen. Bottom Line Before you decide to rent your house, make sure to carefully weigh the pros and cons of becoming a landlord. For some homeowners, the hassle (and the expense) may not be worth it.
Condos Could Be a Win for Today’s Buyers Not every homebuyer wants the biggest house on the block. Some want something simpler, more affordable, and easier to maintain, especially in a market where every dollar counts. That’s where condos come in. For first-time buyers, they can be a smart way to get into homeownership without stretching your budget. For downsizers, they offer less space to maintain with the flexibility to stay in a great location. And right now, condos are one of the most buyer-friendly parts of the market. Condo Inventory Is Up, And That Means More Choice According to the National Association of Realtors (NAR), there are 194,000 condos for sale right now. That’s the second highest amount we’ve seen in the last three years (see graph below): Just remember, this is the national figure. The exact number is going to vary based on where you’re looking to buy. But, generally speaking, you have more options and less competition. You’re not stuck waiting for something to pop up or rushing into an offer just to beat someone else to it. You’ve got plenty to choose from. And if you’re particular about layout, location, or amenities, this is your chance to be selective. That’s a big shift from the market frenzy of just a few years ago. Compared to early 2022, we’ve got nearly double the condos available now. That gives you more breathing room to find the right fit. Prices Are Cooling, and Buyers Hold More Negotiating Power And since there are more for sale, many sellers are more open to negotiating right now. So, you may be able to get a better price. As Redfin explains: “. . . condo buyers in many cities may be able to find sellers who are willing to give concessions and/or sell for less than their asking price.” Condo prices are starting to ease in many markets. According to Intercontinental Exchange (ICE), condo prices dipped 1.3% in June compared to last year. And over half of the top 100 U.S. metros saw condo prices drop slightly year-over-year. Data from Redfin shows what the recent dip in prices looks like (see graph below): That doesn’t just help with affordability, it also shifts the power dynamic. Condo buyers in many markets are now in a position to negotiate on price and ask for concessions, like help with closing costs. Bottom Line Condos aren’t just a fallback option. In today’s market, they’re one of the most strategic ways to buy. With more options, softening prices, and more room to negotiate, now could be the right time to make your move. Could a condo check more boxes than you expected? Let’s talk through your options and find out.
More Contracts Are Falling Through. Here’s How To Get Ahead. When you sell a house , the last thing you want is for the deal to fall apart right before closing. But according to the latest data from Redfin, that’s happening a bit more often lately. The good news is, it’s completely avoidable if you lean on an agent for insight into why that is and how to avoid it happening to you. This June, 15% of pending home sales fell through . That means those buyers backed out of their contracts. That’s not too much higher than the norm of roughly 12% from 2017-2019, but it’s still an increase. And it’s one you don’t want to have to deal with. The key to avoiding this headache is knowing what’s causing the issues that lead to a buyer walking away. A recent survey from John Burns Research and Consulting (JBREC) and Keeping Current Matters (KCM) finds that agents reported the #1 reason deals are falling apart today is stemming from the home inspection (see graph below): Here’s why. With high prices and mortgage rates stretching buyers’ budgets, they don’t have a lot of room (or appetite) for unexpected repairs. Not to mention, buyers have more options to choose from now that there are more homes on the market. So, if the inspection turns up a major issue, they may opt to walk away. Afterall, there are plenty of other homes they could buy instead. Or, if the seller isn’t willing to tackle repairs , a buyer may back out because they don’t want the expense (and the hassle) of dealing with those issues themselves. The good news is, there’s a way you can get ahead of any unpleasant surprises as a seller, and that’s getting a pre-listing inspection. It’s not required, but the National Association of Realtors (NAR) explains why it’s helpful right now: “To keep deals from unraveling . . . it allows a seller the opportunity to address any repairs before the For Sale sign even goes up. It also can help avoid surprises like a costly plumbing problem, a failing roof or an outdated electrical panel that could cause financially stretched buyers to bolt before closing .” What’s a Pre-Listing Inspection? It's exactly what it sounds like: a professional home inspection you schedule before your home hits the market. Here’s what it can do for you: Give you time to fix what matters . You’ll know what issues could come up in the buyer’s inspection. So, you’ll have time to take care of them before anyone even walks through the door. Avoid last-minute renegotiations . When buyers uncover unexpected issues after you’re under contract, it opens the door for concessions you may have to make like price drops or repairs, or worse, a canceled deal. A pre-listing inspection helps you stay ahead of those things before they become deal breakers. Show buyers you’re serious . When your home is clean, well-maintained, and already vetted, buyers see that. It builds trust and can help you sell faster with fewer back-and-forth negotiations. The bottom line? A few hundred dollars upfront can save you thousands later. Should Every Seller Do This? Not necessarily. Your real estate agent can help you decide what makes the most sense for your situation, your house, and your market. If you decide to move forward with a pre-listing inspection, your agent will guide you every step of the way. They’ll: Advise on whether to fix or disclose each issue Help you prioritize repairs based on what buyers in your area care about Make sure you understand your local disclosure laws Bottom Line If you want to avoid potential snags in your deal, a pre-listing inspection could be the way to go. Let’s talk about whether a pre-listing inspection is the right move for your house and market. Would you rather find out about a major repair now, when you can handle it on your terms – or after you’re under contract, when the clock is ticking?
