Potential Housing Bubble As Real Estate “Unhinges” From Economy, Experts Say

Home prices are rising and bidding wars are raging in some areas of the country, and experts are warning that the U.S. real estate market might experience a bubble soon.

Home prices have reached record highs over the past two years, a trend that many say is similar to the months preceding the housing bust of 2008. Mortgage rates hit 5% in early April, according to the Mortgage Bankers Association, and data from shows that median list prices are up almost 15% from 2021. Buyers' monthly mortgage payments have also increased by 42% since last year. The average American household now must spend more than 31% of their monthly income to afford an average mortgage, according to mortgage technology provider Black Knight. This puts pressure on borrowers and may cause an "unhinging" of the real estate market from economic fundamentals, say researchers at the Federal Reserve Bank of Dallas.

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The combination of high mortgages and high listing prices might cause a bubble that will soon pop, says George Ratiu, Manager of Economic Research at Prices are skyrocketing in neighborhoods in Silicon Valley and Austin, TX, where buyers must stretch their budgets to afford a home.

Other parts of the country are already beginning to suffer the consequences of this potential bubble. Home prices are racing down in cities like Rochester, NY. In some ways this is good, as it attracts new residents to areas like the Rust Belt that need more workers, says Ratiu. That being said, prices are still enormously high in more desirable areas. Luckily for homeowners, while the corrections are all but certain, an enormous spike in foreclosures or a catastrophic crash are less likely to occur.