Is the Housing Market Rally Sustainable?

Real Estate Market Still Frothy

Home prices have surged throughout 2021, with tight inventory and low interest rates sparking bidding wars across the country. That has shut many buyers out of the market as home builders are reluctant to add new supply given higher labor and material costs. As a result, home prices have increased by as much as 20%, leading many to worry about a crash. After all, home prices appreciating by double digits is not sustainable forever.

However, the real estate market may not be headed for a crash like what took place in 2008. Current conditions are much different than they were during the 2008 real estate bubble, which resulted in record foreclosures.

Inventory Remains Tight

For one thing, the supply and demand environment is different than it was in 2008. Fifteen years ago there was a glut of inventory in the housing market. About 2 million homes were constructed each year at the building peak during that period. Today the rate is just 1.6 million.

Given severe housing shortages, there is less risk of a housing bubble bursting. Home prices are still climbing at record rates. In May, home prices increased 16.6% across the nation compared to a year ago. This marked the highest monthly increase since the S&P CoreLogic Case-Shiller report launched more than thirty years ago.

Market May Be Cooling Gradually

While the real estate market is still frothy, there are signs it is beginning to cool down somewhat. Skyrocketing prices and a lack of inventory have led to a decline in sales of new and existing homes in recent months.

New home sales decreased 6.6% in June—the most significant dip since April of last year. This marks the third month of slowing sales. The pace of sales of existing homes has also been slowing in recent months but moved higher in June, albeit slightly. If buyers remain on the sidelines it could send prices lower and cool off an extremely hot real estate market.

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