Housing Market Bubble Will Start in The Big City

(Thu, 16 July 2020). The bursting of the housing bubble will likely begin in big cities as more Americans move to the suburbs. It looks like post-pandemic America will hurt large urban centers the most. Large urban centers could be on the brink of a new housing crisis.

Homebuying demand remains strong despite an uncertain economic outlook. Home prices are rising due to tight supply and high demand. Home prices could decline in big cities as Americans flee to the suburbs. Mortgage rates keep falling, having set another record low last week. The average interest rate for 30-year fixed-rate mortgages declined to 3.19% from 3.26%. Such low rates have been fueling the U.S. housing market.

The total volume of mortgage applications increased by 5.1% last week, according to the Mortgage Bankers Association. Applications to refinance a home loan rose by 12% for the week and were up 107% compared to a year ago. Homebuyers’ demand fell by 6% for the week but was 16% stronger than a year ago.


Home Prices Are Rising – For Now

Record low mortgage rates have boosted housing demand. Not everyone who wants to buy a home can do it, though, as there is a lack of homes to sell. High demand and a low supply of properties have increased home prices, making them less affordable. As measured by CoreLogic, home prices rose 4.8% year over year in June, the fastest growth rate since November 2018. Fannie Mae expects home prices to increase by 4.4% this year.

Like the bond and stock markets, the housing market is in a bubble. All those markets could tumble in the coming months. The rapid surge in unemployment during the pandemic has created uncertainty about the economic outlook. Fannie Mae expects house price appreciation to slow in 2021 due to persistently high levels of unemployment.


The Housing Market Will Pop First In Big Cities

The housing bubble will likely burst first in urban markets across the U.S. Prices for existing homes in 19 major U.S. cities rose 4% in April from a year earlier, according to the S&P CoreLogic Case-Shiller National House Price Index. According to Nobel Prize-winning economist Robert Shiller, the pandemic could cause urban home values to fall if employees continue to work from home and give up big cities.

Several Americans have started working from home during the pandemic to respect social distancing. As virus cases are rising in the U.S., this way of working will likely become permanent for many. Workers might be less inclined to pay a premium to live in the city if they don’t need to be close to their workplace anymore.

Restaurants and movie theaters might not be enough to keep people in big urban centers. It’s not very enticing to go to these places, with all the sanitary measures in place. People who lost their jobs don’t have the money to go out anyway.

Fleeing to the suburbs was a trend that was there before the pandemic, which the virus only accelerated. The risk that home prices will decline, especially in big cities, shouldn’t be overlooked. People who are thinking of selling their condo might want to do so before prices plunge. Record-low mortgage rates won’t save the housing market.





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