Home prices surged another 21% in April; experts say it’s not a bubble

Fear of missing out fueled another record increase in home prices in April, but the seemingly relentless pace of growth is approaching an end, some economists said.

Initial signals coming out of May data show housing prices on the verge of dropping, as consumer sentiment and affordability fall. Many experts emphasize, though, that the current market is not a bubble. 

Housing costs jumped 20.9% year-over-year in April, the 123rd straight month of gains, and rose 2.6% on a monthly basis, according to the CoreLogic Home Price Index. Annual price growth in March came in at a similar level, while the monthly increase slowed from 3.3%.

“The record growth in home prices is a result of a scarcity of for-sale inventory coupled with eager buyers who want to purchase before mortgage rates go higher,” said Patrick Dodd, president and CEO at CoreLogic, in a press release. “Most buyers who closed on their home in April had locked in their mortgage rate in February or March when rates were lower than today.”

The steep rise in mortgage rates this year, which in early June came in almost 2 percentage points higher than its end-of-2021 level, is leaving its mark on homebuying sentiment and will moderate price growth, according to Dodd. CoreLogic forecasts the pace of price appreciation to slow to 5.6% by April 2023.

“With 30-year fixed mortgage rates much higher now, we expect to see waning buyer activity because of eroding affordability,” Dodd said. 

CoreLogic’s predictions are echoed elsewhere. The effect of skyrocketing prices and spiking mortgage rates have brought homebuyer sentiment down closer to levels not seen since the first months of the COVID-19 pandemic, according to Fannie Mae. The government-sponsored enterprise’s Home Purchase Sentiment Index, which is calculated based on consumers’ opinions toward homebuying, selling, interest rates, income and job outlook, came in at 68.2 (on a 100-point scale) in May, 11.8 points lower than a year ago and edged down 0.3 points on a monthly basis. Fannie Mae reported that a survey-high 79% of respondents considered it a bad time to buy a home in May, while 70% felt mortgage rates would rise further over the next 12 months.

“The share reporting that it’s ‘easy to get a mortgage’ also decreased across almost all segments,” said Fannie Mae Chief Economist Doug Duncan in a press release.

But slowing demand likely won’t provide much relief after the last two years, especially for the first-time buyer. The lack of affordability — now compounded by higher rates and inflation — has been a running theme over the past two years, reducing options for aspiring homeowners. NerdWallet found available inventory plunged by 62% since pandemic onset, with some cities, including Raleigh, North Carolina, and Nashville, Tennessee, seeing housing supply decline by over 70%.

Since April 2020, home prices also rose by approximately 26% adjusted for inflation, NerdWallet determined. The surge drove asking prices for homes across the country’s most populated metropolitan areas in the first quarter 6 times higher than a typical first-time buyer’s income, an increase from 5.5 times in the previous quarter. Properties in Los Angeles, San Diego and San Jose, California, were the furthest out of reach for a new buyer with homes selling at 12, 10 and 9.4 times their income.  

Current sentiment, according to Fannie Mae’s Duncan, “will likely continue to squeeze would-be homebuyers — as well as those potential sellers with lower, locked-in mortgage rates — out of the market, supporting our forecast that home sales will slow meaningfully through the rest of this year and into next.”

Signs of a pullback already appear to be emerging. While CoreLogic’s analysis of public records and servicing and securities real-estate databases found 70% of homes selling above asking price in early spring, separate research from Redfin revealed that, in the first few weeks of May, close to 20% of sellers cut their initial asking price, the highest rate since late 2019. Academic researchers also have recently suggested that the housing cycle may have reached its apex, 

According to CoreLogic’s findings, Florida posted the highest annual price gain in April at 32.4%, followed by Arizona at 28.1%. Tennessee was in third place with an increase of 27.2% from April 2021. The three states also led the U.S. in year-over-year home-price appreciation in March.

But even if prices are headed downward, many experts say don’t expect a bubble to pop, as one did prior to the Great Recession. Sixty percent of a panel of over 100 economists and housing experts participating in the Zillow Home Price Expectations survey indicated that the housing situation did not constitute a bubble in their opinion, but close to one-third, or 32% disagreed. The remaining 8% were uncertain.

“The housing market today is a far different beast than what we saw in the mid-2000s," said Zillow Economist Nicole Bachaud. "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."

Of the group who said the market was not a bubble, 32,5% cited fundamentals behind price growth, grounded by demographics and scarce inventory, for their determination, while 29.2% pointed to low credit risk among originated loans. Another 26% disagreed with the term “bubble” because it indicated a likely crash, which they did not see occurring.

Whether or not the current environment can be defined as a bubble, the majority of the panel still expects a recession coming within the next two years, with 29.8% predicting it would begin this year, and 45.2% said it would arrive in 2023. Another 8.4% thought a recession would hold off until 2024, while 16.7% do not expect one to hit until 2025 or later.