Do 'Flashing Red' Signs Mean the Housing Bubble Will Burst?

Is there a housing bubble in the United States, and is it about to burst?

This tricky question is now at the top of the minds of buyers, sellers, and people who have lived in their homes for a long time. Many first-time buyers are starting to think that a large-scale market correction and the large price drops that would likely follow could be the only way they can afford to buy a home in this stressed, wildly overpriced market. But it has become the stuff of nightmares for owners who worry that they bought their home at the market's peak and that prices are about to drop, which will hurt their equity and make their investment worth less.

After reaching record highs this summer, home prices are now starting to go down because higher mortgage interest rates are hurting the market.

In a blog post earlier this month, John Burns of the firm with the same name wrote that 16 of the 20 signs of a housing market bubble are "flashing red."

In the wake of the Great Recession, 73 housing executives got together at a summit in 2013 and came up with these warning signs. They range from social indicators that aren't as important (like a lot of expensive housing industry parties with big-name acts) to the main economic indicators that led up to the 2008 housing crash, like the price of homes going up, sales going down, and demand going down.

Burns is not on his own. Indicators that the Federal Reserve Bank of Dallas watches for signs of a housing bubble "started to flash red as if we were back in 2004," says Enrique Martnez-Garca, a senior research economist and adviser at the bank.

Does that mean for sure that another bubble is about to burst?

Real estate experts from all over the U.S. haven't come close to agreeing on this yet. The word "bubble" is disputed by many, and people have different ideas about what it means. Some people say that the housing market today is nothing like it was before the housing bubble that caused the Great Recession. Still, some people say the country is in the middle of one that is about to get very bad.

Some people believe that the country as a whole is not in a bubble, but that some real estate markets, like Phoenix, could be in a bubble because of the COVID-19 pandemic.

The pandemic, says Daren Blomquist, vice president of market economics at Auction.com, caused the housing market to have a "sugar rush." The site is mostly about homes that are owned by banks but are in bad shape. These homes often go through foreclosures or short sales. "Finally, we're coming down from that high."

Most people agree on one thing: the housing market is going through a correction that is likely to last into next year. No one really knows how bad it will get. And a lot will depend on where mortgage rates go from here.

Aaron Brown, who teaches math and finance at New York University and writes for Bloomberg, says, "It's hard to see a happy ending." But "it won't cause the financial system to collapse."

Even if there is no bubble, home prices could fall—a lot.

Even if the housing market gets better, home prices could still go down. A lot.

The interest rate on a mortgage is more than twice as high as it was a year ago. This makes monthly payments much more expensive. Fewer buyers can get loans now. Those who can still buy a home can only do so for a lot less money than they could at this time last year.

Most real estate experts think that the places where home prices went up the most and where bidding wars got out of hand during the pandemic will be the most at risk. Some of the biggest changes could happen in places like Austin, TX; Phoenix, AZ; San Diego, CA; and Boise, ID.

Real estate experts have different ideas about how much home prices in these places could fall.

Habib of MBS Highway thinks prices could drop by 6% to 7% in these hot markets but only by 1% to 3% everywhere else. McBride of Calculated Risk thinks that prices could drop 20% in these areas, compared to a 10% drop across the country.

McBride says, "If you think a bubble is when home prices start to fall, then we're probably in one."

He doesn't think the country is in a bubble because investors aren't betting as much as they did in the 2000s.

He says, "Housing is like a cycle." "It goes up and down."

Prices don't always go down; sometimes they just stay the same. Because prices aren't going up as fast as inflation, homeowners can experience small losses due to inertia. It's not the best thing that could happen, but it's not the worst, either.

Brown of Bloomberg says, "The most likely outcome is not an epic crash." "The most likely outcome is that prices stay the same for a few years, sellers don't sell because they don't want to sell at a loss, and everyone is unhappy."

Investors might be getting worried.

One thing that made the last housing bust so bad was that speculation got out of hand. Investors were buying houses to turn around and rent out. They built their business plans around the idea that home prices would always go up. It was a self-fulfilling prophecy because all the competition for real estate kept pushing up prices until the market crashed.

Even after the Great Recession, when things were very bad, investors never left the market for good. Flippers like Chip and Joanna Gaines and Drew and Jonathan Scott, who became well-known, helped HGTV build a huge business. Then, during the pandemic, investors stepped up again in a big way. More iBuyers and institutional investors like pension funds and hedge funds joined the action, especially in the Sun Belt. Many first-time buyers couldn't get in because they bought a lot of homes in certain areas, often with all-cash offers.

Many of the bigger institutional investors are in better financial shape now than they were in the early 2000s.

Even so, investors are still worried. During the pandemic, they were willing to pay 9% less than the value of the distressed homes listed on Auction.com. They did this because they were sure that rising home prices would mean they would make a big profit after fixing up these homes and selling them again. In Phoenix, some people paid 26% more than what the homes were thought to be worth. More than half of the people who use Auction.com do home flipping.

Now, even in Phoenix, they don't want to buy anything for less than a 20% to 25% discount. That's not good for the housing market because it means investors are less certain they can make money if prices stop going up.

At the very least, says Blomquist of Auction.com, this means that home prices will go down.

Fewer homes are selling.

Experts worry that the number of home sales could go down even more. NAR says that sales of already-built homes dropped 19.9% in September compared to the same month last year. That doesn't always mean there's a housing bubble, but it's still a worry.

Builders are also putting off building as many new homes because people aren't buying them as quickly.

Bryan Kyle of First Serve Realty has been a real estate agent and property manager for 36 years. He works in Las Vegas, which was the centre of the last housing bubble. He has never seen the market change so quickly.

In the past few years, he would sometimes get up to 20 offers on a house that was for sale. Some homes aren't getting any offers at all.

But he has seen much worse than real estate being "stuck in the mud."