As home prices continue to break growth records, a panel of housing experts and economists surveyed by Zillow does not believe the market is in a bubble.
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The latest Zillow Home Price Expectations Survey polled more than 100 experts from academia, government and the private sector to gather their opinions on the state of the housing market and future growth, inflation forecasts and recession risks.
Of those surveyed, 60% said they do not believe the U.S. housing market is currently in a bubble, compared to 32% who think we are in a bubble, and 8% who are not sure.
"Americans have seen home values rise at record rates over the past few years. But although a recession is looking more and more likely, 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."
The most popular reason for respondents rebuffing the bubble thesis is strong market fundamentals, including demographics, scarce inventory and shifting housing preferences. Low credit risks as a justification followed, due to sound loan underwriting and the overwhelming share of fixed-rate, fully amortized mortgages. Another large group of respondents reject the term "bubble," which implies a subsequent crash that they do not believe is imminent.
Among those who do believe we're in a bubble, unaffordable prices in the absence of record-low mortgage rates is the chief rationale.
While the panel largely does not believe the housing market is in a bubble, it does foresee a recession coming soon.
The Federal Reserve is working to strike a balance between twin mandates of reducing rampant inflation and avoiding a recession. Those polled by Zillow are skeptical that this "soft landing" will be achieved, as 56% of survey respondents do not expect the Fed to materially reduce inflation while averting a recession. The remaining respondents are cleanly split, with half believing that the Fed will be successful in avoiding a recession while reducing inflation, and the other half not being sure.
Of those who doubt a soft landing will happen, three-fourths see a short recession as the most likely economic outcome.
The largest portion of the panel (45%) expects the next U.S. recession to begin in 2023, which gathered more votes than 2022 (30%), 2024 (8%) or 2025 and beyond (17%).
"Although the Great Recession was triggered by a housing crash, it's an outlier in the grand history of recessions, which have often strengthened investment in housing due to its relative stability as an asset," Bachaud said.
Despite a more than 100-basis-point increase in mortgage rates since the previous survey just three months ago and the potential for higher rates in coming months, the panel's expectations for 2022 home price appreciation still rose to 9.3% from 9.0% last quarter.
"Rapidly rising mortgage rates and looming recession risk threaten to tame the pandemic's hurricane-force winds that have whipped the market landscape and propelled U.S. home prices skyward," said Pulsenomics founder Terry Loebs. "With home values at record-high levels and a vast majority of experts projecting additional price increases this year and beyond, home prices and expectations remain buoyant. Even among those panelists who believe the U.S. housing market is now a bubble, most expect it to gradually deflate, not suddenly burst." ■