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Homes for sale draw dozens of bids within days. Many homes sell for $20,000 or more above their asking prices. Bidders waive inspections and appraisals that would fix a realistic price.
The U.S. housing market is gripped by irrational exuberance (see FRENZIED HOUSING MARKET BECOMES EVEN MORE INTENSE) with the average home price reaching a record $341,600 in April, according to the National Association of Realtors (NAR), its highest since the association began tracking the figure in 1999.
U.S. housing prices have risen 20 percent since February 2020 and even more in the most sought-after markets, according to NAR data.
Underlying the market’s madness is the U.S. Federal Reserve’s zero interest rate policy and its program of buying $40 billion of mortgage bonds each month.
The Fed’s continuing policies to haul the economy out of its COVID-related crash are “artificially lowering the cost of mortgages and further boosting prices that already looked stretched in many markets,” a CNN Business commentary contended last week.
“The Fed just continues to pour more gasoline on that fire,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNN.
“Everything in the housing sector is going up in price,” Jason Furman, a former Obama administration economic advisor, said in a CNN interview.
“It probably isn’t the case that the Fed should be continuing to artificially hold mortgage rates down,” he said.
However, there are countervailing pressures on the Fed: a jobs market that is less than robust and a stock market addicted to cheap money.
Withdrawing Fed support too soon or too quickly could cause financial and jobs markets to tumble, which happened in Europe in 2011 when the European Central Bank tightened policies abruptly during the recovery from the Great Recession.
The ill-timed move threw the continent into a double-dip recession.
However, the Fed-fueled housing free-for-all – with contesting bidders offering lavish prices, often all in cash – and lenders’ tight credit requirements are combining to price young families and first-time buyers out of the market, “subsidizing the rich at the expense of the poor,” as JP Morgan Funds’ chief strategist David Kelly put it to CNN.
Now the housing frenzy may have become a victim of itself, with prices and competition reaching the point where fewer potential buyers can qualify or remain in the market: in April, home sales dipped 3 percent, declining for the third consecutive month.
TREND FORECAST: The housing market will cool over the summer as homes for sale become as scarce as well-off buyers willing to throw money at anything with a “for sale” sign in front of it.
As the market cools, prices will fall but will not plunge catastrophically as they did in the Great Recession; the current U.S. housing shortage will remain in place for at least three more years.
As a result, a 2007-style housing crash is unlikely not only because of the ongoing home shortage but also because, this time, lenders were much more selective about who they loaned mortgage money to.