Housing bubble alert!
Boston Home prices are soaring at the fastest pace in over 15 years, and a panic buying wave for homes has been inflating the real estate price bubble to levels never before seen. Entire swaths of the population are getting priced out of the market as affordable homes are now impossible to find. As a result, several experts and economists, and most notably, Goldman Sachs, have been warning that housing prices must soon face a correction, otherwise, the market will be doomed to face a decades-long hyperinflationary crisis.
The rapid worsening of the affordability crisis is worrying industry analysts, who are arguing the current pace of home price appreciation is becoming increasingly unsustainable. “Every time prices rise another month there’s another sort of swath of the economy, a swath of Americans at that point who can no longer afford to buy homes,” explained Zillow senior economist Jeff Tucker. “So as prices rise, it does make homeownership a more exclusive club.”
Record low mortgage rates and remote work have contributed to an overwhelming demand from homebuyers over the past 17 months. According to the real estate brokerage Redfin, in March, we had the “hottest month in housing market history, with a record 43% of homes selling for more than their listing price”. Almost half of the homes that went under contract had an accepted offer within one week after being listed. All across the country, homes are being immediately snatched up after hitting the market. Supply chain disruptions also helped the meteoric rise in building costs for new homes, with lumber prices surging more than 200% in a year. “Builders are now building as fast as they can. But the U.S. housing market, one year’s worth of construction, even with everybody firing on all cylinders, just can’t really make up for 10 or 12 years of under-building,” Tucker pointed out.
In Massachusetts, with each passing month buyers are getting more shocked in face of the soaring prices on the few homes that are still available. One recent research released by the firm shows that during April, a home in Haverhill sold in 17 days after being listed and for 105.3% above the asking price. Those who cannot even consider the possibility of buying a home but have been looking for more space during the health crisis, have started chasing rents as a more “affordable” alternative.
But data released by CoreLogic indicates that rents for single-family homes in the US surged to the highest level since September 2006, jumping 4.3% in March compared with a year earlier, led by double-digit increases in several states. The combination of all of the mentioned factors is aggravating the affordability crisis to the point of pushing the housing market closer to a sharp price correction. “Affordable housing” is typically defined as housing that costs 30% or less of a person’s income. But for lower-income earners, with such elevated prices, that can be incredibly hard to achieve. It’s against that backdrop that Goldman Sachs has divulged its latest forecast indicating that if the Fed doesn’t hike interest rates to prevent the market from overheating, the bank would expect that “a national housing shortage will fuel substantial home price appreciation for at least a couple more years”. This means that if the Fed continues to artificially boost the housing market by suppressing rates while injects trillions into the economy and financial markets, hyperinflation will definitely make rents and housing prices hit one record high after the other until the bubble becomes so unsustainable that it would pop on its own. In simple terms, Goldman is predicting that home prices will be rising at a pace far faster than the epic 2006-2007 housing bubble – and that the effects of this surge in prices will make the coming hyperinflation anything but transitory.
In essence, the bank’s forecast suggests that the Fed is left with two choices and neither of them looks good. Either they raise interest rates to fight inflation and trigger a housing market crash in that process so that prices finally readjust, or they keep maintaining the market artificially heated and let the price bubble expands as much as it can possibly go before imploding itself and end up on a catastrophic bust – and throughout that process not only real estate and rental markets would be facing exceedingly high prices, but the entire economy – as if it isn’t already. So whether they decide to mitigate the housing bubble explosion now or later, the frantic rally is bound to culminate in a crash. The only thing is – the more the bubble grows the sharper will be its collapse
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