Although home prices continue to break growth records, a panel of housing experts and economists surveyed does not believe the market is in a bubble.
The latest Zillow Home Price Expectations survey [1] polled more than 100 experts from academia, government and the private sector to gather their opinions on the state of the housing market and future growth, inflation forecasts and recession risks.
Of those surveyed, 60% said they did not believe the U.S. housing market is currently in a bubble, compared to 32% who think we are in a bubble, and 8% who are not sure.
The most popular reason respondents rebuffed the bubble thesis was strong market fundamentals, including demographics, scarce inventory and shifting housing preferences. Low credit risks as a justification followed, due to sound loan underwriting and the overwhelming share of fixed-rate, fully amortized mortgages. Another large group of respondents rejected the term “bubble,” which implies a subsequent crash they do not believe is imminent.
Among those who do believe we’re in a bubble, unaffordable prices in the absence of record-low mortgage rates is the chief rationale.
To be sure, the housing market is incredibly hot. Home values in April are up about 21% over last year, marking the 13th consecutive month of record-breaking annual home value appreciation. Affordability is greatly suffering too, as the astronomical rise in both home prices and rents over the last two years coincides with a more recent hike in mortgage rates. However, an extremely hot market does not necessarily mean one in a bubble.
Although a recession is looking more and more likely, the housing market today is a far different beast than what we saw in the mid-2000s. Unlike in 2006, this market is underpinned by strong fundamentals and has been built on mortgages with sound credit, factors that won’t change in the near term.
When will the next recession hit?
While the panel largely does not believe the housing market is in a bubble, it does foresee a recession coming soon. The largest portion of the panel (45%) expects the next U.S. recession to begin in 2023, which gathered more votes than 2022 (30%), 2024 (8%) or 2025 and beyond (17%).
Can the Fed thread the needle?
The Federal Reserve is working to strike a balance between twin mandates of reducing rampant inflation and avoiding a recession. Those polled by Zillow are skeptical that this “soft landing” will be achieved, as 56% of survey respondents do not expect the Fed to materially reduce inflation while averting a recession. The remaining respondents are cleanly split, with half believing that the Fed will be successful in avoiding a recession while reducing inflation, and the other half who are not sure.
Of those who doubt a soft landing will happen, three fourths see a short recession as the most likely economic outcome.
Home price expectations still rising
Despite a more than 100-basis point increase in mortgage rates since the previous survey just three months ago and the potential for higher rates in coming months, the panel’s expectations for 2022 home price appreciation still rose to 9.3% from 9.0% last quarter. This would be a significant step down from the 19.6% appreciation observed over the 2021 calendar year, but still high above long-term historical averages.
Looking forward, the most optimistic quartile of respondents predicted prices would rise 46.1% between now and the end of 2026, while the most conservative quartile predicted a cumulative rise of only 9.3% in that time. On average, respondents are forecasting a 26.4% cumulative rise by the end of 2026.
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