Should you buy a home in the hottest market ever? Huge gains can’t continue, experts warn

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The U.S. housing market is on an absolute tear. Month after month, prices break new records. Sellers are ecstatic. While buyers can revel in mortgage rates near all-time lows, that’s about the only upside to shopping for property in this market.

If you’re considering buying a home now, the soaring prices raise an obvious question: Should you join the bidders who are pushing prices ever-higher?

Some, like Desmond Lachman, a senior fellow at the American Enterprise Institute, urge caution. He says the Federal Reserve’s move to slash interest rates during the coronavirus pandemic has inflated everything from home values and stock prices to cryptocurrencies and collectibles.

“If you buy now, you’d be buying at the top,” Lachman says. “It’s not just the housing market but it’s all these other markets that are in danger of tanking.”

Ken Johnson, a real estate economist at Florida Atlantic University, is similarly skittish about the straight-up trajectory of home values. While he expects any correction in home prices to be mild, those buying at the top of the market are unlikely to reap big returns, he warns.

“Trees do not grow to the sky and neither do home prices,” Johnson says. “We’re nowhere near where we were at the peak of the last housing cycle, but we do need to be careful. Walking away from an obviously overvalued home may be the best thing buyers can do in this kind of market.”

Home prices are soaring

When the U.S. economy went into lockdown in the spring of 2020, many expected home values to go into a deep freeze. Instead, prices rocketed to new highs, and then kept climbing.

June’s 18.6 percent price gain for national home prices was the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. (July numbers are not yet available.) June marked the third consecutive month of record home price appreciation.

“The last several months have been extraordinary not only in the level of price gains but in the consistency of gains across the country,” says Craig J. Lazzara, managing director at S&P Dow Jones Indices.

The metro areas of Boston, Charlotte, Cleveland, Dallas, Denver and Seattle all recorded their highest-ever levels of price gains.

That’s a sharp contrast to the housing bubble of 2005 to 2007, when prices soared in coastal markets but stayed low in many inland metro areas.

What’s driving home prices higher

Soaring home prices are largely a function of an imbalance between supply and demand. Construction never returned to the levels seen before the Great Recession, putting a damper on supply. On the demand side, the maturing of the millennial generation means millions of Americans are forming households.

Logan Mohtashami, analyst at HousingWire, says there are more than 32 million Americans ages 27 to 33. “This is the biggest demographic patch ever recorded in U.S. history, and the median age of first-time homebuyers is 33,” he says.

For that reason alone, home prices are unlikely to fall, Mohtashami says. He points to other factors, such as strong credit scores among mortgage borrowers and relatively stringent guidelines by lenders.

Lachman isn’t so sure. He fears the Fed is inflating a bubble. “It’s fun while they’re printing the money and everything is going up. But the question is what happens when interest rates go up,” Lachman says. “By keeping interest rates this low for this long, what they’ve done is they’ve created an everything bubble. It’s not just the housing market.”

Most observers don’t expect a crash like the one that the housing market endured from 2008 to 2010. Home owners have record levels of equity in their properties, which makes a foreclosure crisis unlikely.

What homebuyers can do

It’s a seller’s market in nearly every housing market in the U.S. If you’re shopping for a home, here’s how you can avoid overpaying:

  • Take a deep breath. A market that’s this hot creates its own sense of urgency. Johnson suggests avoiding paying more than you think a home is worth — there will always be another house.
  • Consider local population trends. The populations of Texas, Florida, Utah and North Carolina are growing. But in some Rust Belt markets, populations are declining, a reality that drags down demand for homes. Buying in a hot market gives you more of a cushion than buying in a place where the population is shrinking, Johnson says.
  • Shop hard for a mortgage. Buyers might not have much bargaining power when it comes to bidding for homes, but you can shop hard for a home loan. Getting multiple loan offers can save you thousands of dollars over the life of the loan.
  • Be cautious about bidding wars. It’s not easy to avoid multiple bidding situations in today’s market, where buyers are paying tens of thousands of dollars over list price just to get a home.
  • Go into the bidding with a plan. In the heat of battle, it’s easy to boost your price by a lot just for the sake of trying to win. Before you get into a bidding war, set a clear ceiling on the amount you’re willing to offer for the property and stick to it.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
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Senior mortgage editor