U.S. homebuying surge: When does it end?

As housing omens go, beware the trending Google search.

In the first week of April, U.S. search interest in the phrase “when is the housing market going to crash” jumped 2,450% compared with the previous month, and the phrase is now more popular than at any time since 2004, according to Google. The search terms “should I buy a house” and “sell my house” also reached record interest.

Market watchers are right to be wary. The median sale price of an existing home in the U.S. was $313,000 in February, up nearly 16% from a year earlier, when a 3% to 5% annual increase is considered healthy, according to a report from the National Association of Realtors, a trade group.

“I think it’s what’s on everybody’s mind,” said Jonathan Miller, a New York appraiser who analyzes markets nationwide. “How long is it going to last?”

The answer will depend largely on where you live and how the pandemic continues to reorder buyer priorities, but it will hinge on two trends: rising mortgage rates and incredibly tight inventory in some markets, which will likely keep demand strong through the rest of 2021, even as price growth moderates, several analysts said.

What awaits at the end of this frenetic period is not likely to resemble the 2008 housing bubble, which brought on a drawn-out crash when it finally burst, they said. Today’s supercharged market has been caused by pandemic forces that have challenged other assumptions about the market. Even as the pendulum has swung toward increased demand in suburban markets, cities, too, are surging.

Nationwide, housing inventory was at a record-low 1.03 million units at the end of February, down 29.5% from a year earlier, a record decline, according to the National Association of Realtors.

As a result, homes sold in an average of 20 days, a record speed, when 60 days is typical, said Lawrence Yun, the group’s chief economist.

“It gives the feel of a bubble,” Yun said, recalling the run-up to the subprime mortgage crisis that cratered prices after 2008. “But the fundamental factors are different.”

Unlike the last major housing crisis, in which sale prices plummeted and many buyers were stuck with risky, adjustable-rate financing, today the average 30-year fixed-rate mortgage remains near record lows, lenders rely on stricter underwriting requirements, and homeowners have more liquidity.

“We don’t have the reckless lending that we had before,” said Miller, and so even as market conditions get frothy, some may find that they overpaid for their property, but the ebb and flow will be more in line with regular economic cycles.

Yun expects the volume of U.S. home sales to drop 10% in the fourth quarter of 2021 compared with the year-ago period, as mortgage rates climb closer to 3.5%, up from about 2.7% at the start of 2021.

He also expects home prices to keep rising in the short term, because of more than a decade of sluggish housing construction, hobbled by restrictive zoning and high labor costs.

Still, the pandemic has affected markets in different ways. In New York City, where commercial real estate was battered and homebuyers fanned outward to surrounding suburbs in search of affordability and more space, the sales market fell off at the beginning of the pandemic but appears to have turned the corner.

“The rate at which homes are selling nationally is not sustainable, but in New York, the uptick is just getting started,” said Nancy Wu, an economist for StreetEasy, a listing website.

In the week ending April 11, there were 783 new signed contracts citywide, the highest since the company began tracking weekly pending sales in 2019, when the peak was 491 contracts, she said.

Source: Orange County Register