5 warning signs in the real-estate market that recall the mid-2000s housing bubble

housing
  • Several gauges of housing market activity mirror trends seen just before the bubble burst in 2008.
  • Experts see the current boom as far safer than the prior rally, citing stronger lending requirements.
  • Still, here are trends ranging from home prices to construction activity that resemble 2005 and 2006.
  • See more stories on Insider’s business page.

Housing-market monitors keep repeating the phrase “since 2005,” except when it’s “since 2006.” That’s worrying – both superlatives refer back to the peak of a historic real-estate bubble.

Low mortgage rates and massive demand have powered a supercharged rally for US housing over the last year. Americans snapped up nearly all the available supply of new and previously owned homes amid huge population shifts from cities to suburbs. Chronic underbuilding after the financial crisis left contractors struggling to meet the new demand with adequate supply. That imbalance has since pushed selling prices skyhigh.

The boom’s frenetic nature has led many to compare the current market with that seen just before the infamous 2008 crash. Experts have been quick to note that, while some similarities exist, the latest price surge has more to do with a lack of inventory than dubious lending standards.

“I don’t see the kind of financial stability concerns that really do reside around the housing sector,” Federal Reserve Chair Jerome Powell said last month. “We don’t see bad loans and unsustainable prices and that kind of thing.”

But just because the market looks different on a macro level doesn’t mean there aren’t strong similarities to the period just before the bubble burst. Here are five housing-market signals flashing the same signs seen about 15 years ago.

(1) CoreLogic Home Price Index

Possibly the most basic indicator of just how much demand has outstripped supply is nationwide price indexes.

The headline price gauge for housing-data authority CoreLogic soared 11.3% year-over-year in March, according to a Tuesday report. That marks an acceleration from the February rate of 10.4% and the fastest rate of price growth since March 2006. On a month-over-month basis, prices rose 2% from their February levels.

The financial analytics firm sees that momentum cooling over the next year. A persistent wearing-away of home affordability will likely curtail some purchases, and accelerated construction will shore up supply in the months ahead, CoreLogic said. Still, year-over-year price growth should reach 3.5% as lingering demand keeps the rally alive, Frank Martell, the president and CEO of CoreLogic, said in a statement.

“With prospective buyers continuing to be motivated by historically low mortgage rates, we anticipate sustained demand in the summer and early fall,” he said.

(2) S&P CoreLogic Case-Shiller Index

Separately, a more city-focused measure of home-price inflation notched a similar reading last week. Home prices in metropolitan areas gained 12% year-over-year in February, according to the S&P CoreLogic Case-Shiller Home Price Index, the headline index of US home prices for more than three decades. The reading signals the strongest price growth since 2006 and edged slightly higher from the prior annual gain of 11.2%.

Inflation was broad-based. All 20 cities saw home prices climb, and 19 cities saw year-over-year price growth accelerate from January to February. Prices rose the most in Phoenix, San Diego, and Seattle, according to S&P.

(3) Selling prices for new vs. previously owned homes

Digging deeper into home sales reveals an unusual phenomenon unseen since the previous boom. For the first time since 2005, Americans spent more on previously owned single-family homes than on new construction, according to March housing data from the Census Bureau and the National Association of Realtors.

The dynamic signals Americans are prioritizing buying any available home instead of hunting down a new unit.

To be sure, monthly sales data is volatile and the premium for new homes could reemerge in April data. But with supply still under pressure and CoreLogic’s Tuesday report showing prices broadly climbing higher last month, the phenomenon might linger for some time.

(4) Home starts

As gauges of market demand soar to 15-year highs, so have measures of upcoming supply. Housing starts surged nearly 20% in March as contractors rushed to address the lack of new homes for sale. The leap places the annual rate of starts at its highest since 2006 and serves as the largest month-over-month gain since 1990. Permits for new residential construction also increased, albeit at a slower rate.

The rebound was somewhat prompted by winter storms curbing construction activity in February. But for the most part, a historic shortage of available homes fueled the pickup in building. Just 1.07 million existing homes were up for sale in March. That sum, at the current purchase rate, would be snapped up in only two months.

Homebuying has slowed from its pandemic-era peak, giving contractors slightly more time to meet the elevated demand. With millennials hitting peak homebuying age and lumber prices expected to decline, some economists see the rebound in construction paving the way for more moderate price growth.

(5) Home equity take-out

The sustained acceleration of home price growth has also lead owners to take out equity at the same rate seen in the mid-2000s. Homeowners refinancing their mortgages pulled roughly $50 billion in equity out of their homes throughout the fourth quarter of 2020, according to data from Freddie Mac and the Urban Institute.

Mortgage rates, while still at historically low levels, reversed their pandemic-era decline through the first quarter as investors braced for the economic recovery to give way to higher borrowing costs. Those higher rates erased the rate-reduction incentive for refinancing, making equity take-out the top reason to refinance, the Urban Institute said in a report published April 27.

Although equity take-out on its own is normal, the sharp uptick seen last year could be cause for concern. Some economists have criticized the Fed’s ultra-accommodative policy for encouraging risk-taking across various markets. Increased equity take-out presents new financial risks for participating homeowners since a decline in home prices from their skyhigh levels could cut deeply into their balance sheets.

And while equity take-out sits at its 2005 level, it is still well below the 2006 peak. Yet with mortgage rates expected to climb over the next few years, take-out refinancing could accelerate further.

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Expensive lumber costs have added $36,000 to the average price of a new home, report finds

construction workers building home
Construction workers build a new Centex home on Tuesday, June 23, 2020, in Houston.

  • Expensive lumber has added to the costs of new houses in a year when all house prices have skyrocketed.
  • NAHB found that soaring lumber costs have added $35,872 to the average price of a new home.
  • Experts are concerned that high home prices will hinder homebuying for many – especially millennials.
  • See more stories on Insider’s business page.

Just a few months ago, in February, the National Association of Home Builders (NAHB) released shocking data about how the historic appreciation in lumber prices was crimping the housing market. A newbuild was $24,000 more expensive, on average.

Three months later, that number now stands at $35,872.

The housing market took off last summer, as the pandemic enabled many to work from home indefinitely, and with mortgage rates so low, many people rushed to buy new homes. But the pandemic shut down lumber production, and it hasn’t kept pace with building since.

“This unprecedented price surge is hurting American home buyers and home builders and impeding housing and economic growth,” NAHB Chairman Chuck Fowke said in a statement. “These lumber price hikes are clearly unsustainable. Policymakers need to examine the lumber supply chain, identify the causes for high prices and supply constraints and seek immediate remedies that will increase production.”

A report from the NAHB in February said the lumber supply chain impact came as factories shut down almost immediately last March for safety reasons, and then as demand spiked, supply couldn’t keep up. Lumber prices have jumped by 340% compared to last year.

Insider reported on March 26 that because lumber prices are so high, home builders have been building fewer homes and intentionally raising prices to keep up with the high demand for houses amidst the low supply of lumber.

In addition, a report from Redfin – a real estate brokerage- found that the average home sale price hit an all-time record in March, increasing 16% year-over-year t0 $331, 590, and with about one in three homes being sold for more than the asking price in February, experts like Redfin Chief Economist Daryl Fairweather are concerned.

“When the pandemic is over, purchasing a home is going to cost much more than ever before, putting homeownership much further out of reach for many Americans,” Fairweather said in a statement. “That means a future in which most Americans will not have the opportunity to build wealth through home equity, which will worsen inequality in our society.”

Insider’s Hillary Hoffower reported on April 30 that the pandemic and the lumber shortage are combining to put homeownership out of reach for many, but especially the millennials entering their prime homebuying years. Fairweather told said the housing shortage is leaving millennials “boxed out of the housing market.”

On March 12, the NAHB, along with more than 35 other housing organizations, wrote a letter to Commerce Secretary Gina Raimondo asking her to examine the lumber supply chain and look into solutions for the high costs.

They said: “Housing and construction can do their parts to create jobs, boost the economy to its pre-pandemic strength, and provide safe and affordable housing for all Americans, but in order to do so the federal government needs to address skyrocketing lumber prices and chronic shortages.”

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Lumber prices could climb another 12% this year after hitting a record high in April, Piper Sandler strategist says

Logging facility, Vermot
A logging facility in Bristol, Vermont.

Piper Sandler’s Craig W. Johnson, CFA, CMT said he believes Lumber prices could “very easily” move above $1,300 per thousand board feet this year even after notching a record high in April.

That figure represents a 12% increase from Tuesday’s closing price of $1,154 per thousand board feet. Lumber prices have soared more than 250% in the past year alone.

In an interview with Insider, Johnson, a technical research market strategist, said that lumber prices have broken out of a “huge consolidation” that occurred from 2018 through 2020 and are set to soar amid the economic reopening.

Based on technical analysis, Johnson sees lumber prices continuing to rise to at least $1,300 over the next six to nine months.

The strategist noted that there is an enormous demand for housing and renovations that’s pushing lumber prices higher.

Johnson said that with interest rates as low as they are, there’s an overall sense that this is the lowest mortgage rate many people are ever going to get.

As a result of these low mortgage rates, a new work-from-home trend, and young people moving out of cities, home buyers are lapping up properties at historic rates, and that’s putting pressure on lumber supply.

Johnson also said that timber companies are struggling to catch up with demand after shutting down some of their operations during the pandemic.

The technical research strategist added that, based on what he’s been reading, timber companies won’t be putting more sawmills in place to meet demand either because they lack the economic incentive to add capacity.

Creating more sawmills is a capital-intensive process that requires producers to get permits, and that can’t be done quickly.

Johnson also said the upcoming hurricane season could exacerbate the lumber price issue by adding to demand.

When asked what could stall rising lumber prices, Johnson said that only the slowing of economic activity would cause prices to fall, but noted that right now he believes that’s unlikely as we are in the “great wide open” for economic growth post-pandemic.

Lumber traded up 2.7%, at roughly $1,212, as of 12:04 p.m. ET on Wednesday.

Watch it trade live here.

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US home prices soared at the fastest rate since 2006 in February

House for sale US
A house’s real estate for sale sign shows the home as being “Under Contract” in Washington, DC, November 19, 2020.

  • US home prices surged 10.4% year-over-year in February, the biggest such jump since 2006.
  • The market has been red hot during the pandemic, but affordability represents a new challenge.
  • Price growth will cool into 2022 as mortgage rates rise and price out more buyers, CoreLogic said.
  • See more stories on Insider’s business page.

Everyone knows it’s been hard to find an affordable house amid the pandemic, but as the data comes in, it’s becoming clearer just how hard.

The answer: Extremely.

US home prices continued to rip higher in February as supply constraints across the country and outsize demand boosted competition.

Selling prices increased 10.4% in February from year-ago levels, marking the largest year-over-year gain since 2006, according to CoreLogic data published Tuesday. Prices rose 1.2% from levels seen in January 2021. Idaho and Montana saw the biggest jumps, with year-over-year gains of 22.6% and 19.5%, respectively, according to the financial analytics firm CoreLogic.

And the outlet sees another year of more expensive housing ahead, projecting prices will rise another 3.2% by February 2022. The end of the pandemic can ease constraints on supply, CoreLogic said. On the demand side, it expects the lack of affordable housing to cut into some potential purchases.

“The run-up in home prices is good news for current homeowners but sobering for prospective buyers,” Frank Nothaft, chief economist at CoreLogic, said. “Those looking to buy need to save for a down payment, closing costs, and cash reserves, all of which are much higher as home prices go up.”

The housing market was among the few hotbeds of economic activity throughout the coronavirus pandemic. The Federal Reserve’s emergency rate cuts in March 2020 pulled mortgage rates to numerous record lows throughout last year, leading many to take advantage of more appealing borrowing costs. Prolonged work-from-home periods spurred moves from apartment-dense cities into suburbs, which also lifted housing-market demand.

The buying spree quickly snapped up most of the market’s available supply, but that streak recently showed signs of slowing. For one, expectations for a strong economic recovery saw investors dump Treasurys in recent weeks, lifting yields on government debt and in turn leading mortgage rates to swing higher. Rates now sit at their highest levels since June after rising for seven weeks straight.

The turnaround in mortgage rates and soaring prices seemed to finally bite into the housing market’s rally in February. Existing home sales fell 6.6% that month to the slowest rate since August, according to the National Association of Realtors. At the same time, supply remained a measly 1.03 million units, a level that would only satisfy two months of sales at the February rate. Should prices trend even higher, the red-hot market could cool even faster.

“Homebuyers are experiencing the most competitive housing market we’ve seen since the Great Recession,” CoreLogic CEO Frank Martell said. “As affordability challenges persist, we may see more potential homebuyers priced out of the market and a possible slowing of price growth on the horizon.”

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US home prices jumped the most in 7 years in December as the housing-market boom charged into the new year, Case-Shiller says

FILE PHOTO: Homes are seen for sale in the northwest area of Portland, Oregon March 20, 2014.  REUTERS/Steve Dipaola
Homes are seen for sale in the northwest area of Portland, Oregon.

  • The S&P Case-Shiller US home-price index rose to a 10.4% annualized increase in December, up from 9.5%.
  • The reading marks the strongest pace of price growth in seven years, according to a press release.
  • The data suggests the US housing market ended 2020 strong amid low inventory and record-low mortgage rates.
  • Visit the Business section of Insider for more stories.

US home prices surged through the end of 2020 as record-low mortgage rates kept demand at elevated levels, and a general inventory shortage propped up prices.

The S&P CoreLogic Case-Shiller US National Home Price Index posted a 10.4% annualized increase in December, according to a Tuesday press release. The gain follows a 9.4% annualized climb in November and marks the biggest single-month leap in seven years seen by the index, a leading national dataset.

S&P Dow Jones Indices’ 10-City Composite index rose to an annualized gain of 9.8% from 8.9%. The 20-City Composite rose to a 10.1% year-over-year jump from November’s 9.2% reading.

Phoenix, Seattle, and San Diego saw the biggest home-price increases among the 19 cities surveyed in December.

“These data are consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes,” Craig Lazzara, managing director and global head of index investment strategy at S&P DJI, said in a statement. “This may indicate a secular shift in housing demand, or may simply represent an acceleration of moves that would have taken place over the next several years anyway.”

The housing market was one of the few pockets of the economy to see explosive growth through 2020 as new buyers rushed to scoop up dwindling inventory. The Federal Reserve’s decision to drop interest rates to nearly zero in March 2020 dragged on mortgage rates and, along with the onset of the work-from-home era, sparked a homebuying spree. The surging pace of sales for new and existing homes quickly left contractors struggling to keep up.

Though the Tuesday release shows the housing market’s rally set to continue into 2021, momentum has wavered in recent weeks. After the 30-year fixed mortgage rate sank below 3% for the first ever in mid-2020 and stayed there for months, it turned higher in mid-January, signaling the buying frenzy could soon cool.

This shift was one of several January and February datapoints indicating investors are growing wary of inflation leaping higher as the economy recovers. Rising inflation would likely correspond with rising mortgage rates and, in turn, slow home-price growth.

Still, the US housing market will likely thrive through 2021 as more forthcoming stimulus bolsters homebuying activity, Fitch analysts led by Suzanne Mistretta said in a February 16 note. The firm said it expects prices and mortgage volume to continue growing in 2021 due to consistently low borrowing costs and lasting supply constraints. Demand is likely to outpace supply until the effects of the coronavirus pandemic fade, the analysts said. In other words, there won’t be enough homes to go around for a while yet.

Market health could waver should job losses creep into previously unaffected industries and hit higher-income workers, the team added.

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US home prices rose at a record pace in the 4th quarter, surpassing the previous peak in 2005

housing expensive

The median price of a single-family home climbed 14.9% to $315,000 in the fourth quarter, according to the National Association of Realtors.

That’s the fastest pace of growth on record, surpassing the top from the last housing boom in 2005, according to data compiled by Bloomberg.

Every single metro area tracked by the NAR saw home prices grow from a year ago, while 88% (161) of the metros saw double-digit increases, compared to just 115 metros in the third quarter. It’s a sign of the continued housing boom in the US as mortgage rates remain in record-low territory.

The area with the highest price gain was Bridgeport, Connecticut, where prices soared 39%. By region, the Northeast experienced a 20.7% price increase, followed by the West at 15.5%, the Midwest at 15.1% and finally the South at 14.0%.

“Mortgage rates reached record lows, thereby driving up the demand,” said Lawrence Yun, NAR chief economist. “At the same time, inventory levels also reached record lows, leading to grim inventory conditions of insufficient supply in the fourth quarter.”

While Yun noted that low mortgage rates are helping Americans afford their monthly payments, he said that large home price spikes could soon become detrimental to homebuyers. 

“The average, working family is struggling to contend with home prices that are rising much faster than income,” he said. “This sidelines a consumer from becoming an actual buyer, causing them to miss out on accumulating wealth from homeownership.”

The NAR found that families typically spent 14.8% of their income on mortgage payments, compared to 14.9% one year ago. With higher home prices, the average monthly mortgage payment marginally rose to $1,040 from $1,020, even as mortgage rates dropped significantly. 

Read more: Barclays says buy these 33 beaten-down stocks that are perfectly poised to capitalize on the reopening of the economy in the years ahead

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