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

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

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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 are rising at their fastest in 15 years – and Goldman says they’ll surge another 7% this year

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A lack of supply is driving US house prices higher, Goldman said

US home prices soared in the year to January, rising at their fastest rate since 2006 as low interest rates and supply constraints fueled a housing boom.

Yet Goldman Sachs thinks the rally has much further to go: It upgraded its 2021 house-price appreciation forecast to 6.8% from 4.7% previously.

Analysts at the Wall Street giant, led by Apurva Gundaria and Marty Young, said in a note on Wednesday: “Underwhelming supply appears to be the primary driver of continued high levels of house price appreciation.”

Goldman said supply of single-family homes plunged to a record low in early 2020 and has kept falling in the first months of 2021, with supply close to 50% lower by some measures.

The bank said that even the recent rise in mortgage rates, spurred by rising bond yields, was unlikely to hold back the rally because supply continues to lag demand.

“In our view, this supply crunch is driving another leg up in home prices,” the analysts said. “Though mortgage rates have backed up in recent weeks, they still remain below their pre-pandemic tights and the backdrop for housing demand remains supportive.”

However, Goldman said the ongoing boom in housing would slow in 2022. It downgraded its 2022 house-price appreciation forecast to 3.9% from 4.6% previously.

Goldman issued its latest predictions after the S&P CoreLogic Case-Shiller house price index rose 11.2% in January year on year, the fastest rise since 2006 and above economists’ expectations.

Analysts say record-low interest rates have been a key factor, but the desire for more space during the coronavirus crisis has also been important.

“The pandemic incentivized people to dedicate more of their spending on improving their living situations,” James Orlando, senior economist at TD Economics, said in a note. “The consequence has been more buyers either upgrading, or entering the marker earlier than they had planned.”

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

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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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