Housing Price Boom Is Doomed, Forecast Says

Happy couple playing with dog while sitting at doorway in new house
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The year may have come in like a lion when it comes to home prices, but it will go out like a lamb, say forecasters who project home prices next January will grow just 3.3%, compared to a 10% jump this past January.

The wild price growth of late is likely to be reined in by a rise in the rock-bottom mortgage interest rates that have propped up demand, according to a report by real estate data analytics firm CoreLogic on its Home Price Index released Tuesday. Those low rates, combined with ravenous demand for a nearly exhausted housing stock sent prices into the stratosphere as the pandemic sent families on a mission for space. 

“As mortgage rates rise, that will moderate some of the demand from prospective homebuyers,” said Frank Nothaft, chief economist for CoreLogic. The supply squeeze will also ease a bit once more home sellers are vaccinated and comfortable letting strangers traipse around their houses, shifting more homes onto the market. While the next few months will probably see the ballistic trajectory of prices continue, “Lessening of demand pressures, plus a gradual increase in supply, [will work] ... to moderate price growth towards the end of this year,” Nothaft said.

The chill is already being felt as mortgage interest rates have nudged upwards in recent weeks, simmering down the roiling market somewhat. But that might actually prove to be a good thing for the economy.

"Don't worry about a gradual rise in rates,” said Ryan Sweet, head of Monetary Policy Research at Moody’s Analytics. “The housing market is almost too strong. So, the higher rates will cool it down and make housing growth more sustainable."

The CoreLogic forecast could, however, be thrown off in any number of ways, Nothaft said. For example, if interest rates rise unexpectedly, prices might see a sudden correction. Or, if the economy comes charging back to prosperity without a corresponding rise in rates, the party could continue a while longer. But sooner or later, the laws of economic gravity must kick in. “I think 10% home price growth year after year after year, when incomes are rising 2% or 3% at best, that’s unsustainable,” Nothaft said —eventually, buyers simply won’t be able to afford those homes.