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Housing prices rose for the fifth consecutive month in June, likely driven by high demand and rising mortgage rates. The S&P CoreLogic Case-Shiller US National Home Price NSA Index, which covers all nine census divisions in the US, is up 0.7% from the previous month. This reading is only 0.02% lower than last year's historical peak.

Housing prices continue to climb, and what is the future trend?

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The primary reason for the surge in housing prices is due to insufficient inventory, which means there are not enough houses available for sale.

Despite a dent in demand due to soaring interest rates, the issue of insufficient inventory remains severe. On average, between 2012 and 2022, there were 1.4 million new households created each year in the US, while only an average of 1.2 million new homes were built annually.

As inventory shortages in the US housing market prolongs, the competition among buyers becomes highly intense. This has left buyers with little bargaining power when it comes to pricing negotiations. As a result, housing prices are being driven up as buyers must compete against each other for the limited number of homes available on the market.

New multi-family homes are also facing inventory shortages due to rising mortgage rates and prices. Developers are turning to these types of homes because of the strong rental market, which is more profitable than single-family homes as demand for them decreases. However, despite an increase in construction, the supply of housing continues to fall short. The national rental market is booming, with rent prices reaching a record high nationwide in June 2022.

On the one hand, the issue of inventory shortages is unlikely to be resolved in the short term, providing support for rising housing prices. Zillow's Chief Economist, Skylar Olsen, predicts that housing prices will continue to rise until 2024. Real estate entrepreneur Barbara Corcoran believes that lower interest rates will result in higher home prices.

On the other hand, Black Knight's data shows that although housing prices hit another all-time high in July 2023, the rate of increase was slower than the 25-year average, indicating a possible slowdown in the future.

Will the Housing Market Experience a Crisis Like 2008?

The US housing market has become highly financialized, with many real estate mortgages becoming financial assets through asset securitization. This has made Mortgage-Backed Securities (MBS) the second-largest fixed income market after Treasury bonds. As a crucial part of the financial system, risks in the US housing market can potentially extend worldwide.

The US housing market appeared to be inflated from 2005 to 2007, and when the housing bubble burst in 2008, housing prices plummeted, causing a severe recession in the global economy.

During this period, some banks lowered their lending standards, allowing many borrowers without the financial means to take out mortgages and enter the real estate market. As housing prices plunged, the collateral in the mortgage dropped in value or even fell below the loan amount, increasing the risk of default for homeowners and raising the possibility of mortgage defaults.

Investors are questioning whether there is a possibility of another rise in the US mortgage default rate and a repeat of the subprime mortgage crisis of 2008.

Bankrate analysts believe that there are significant differences between the current housing market and that of 2008. Most homeowners with mortgages in 2023 have good credit, higher home equity, and fixed-rate mortgages. Additionally, the US household leverage ratio is lower than before, and mortgage quality has improved significantly.

In contrast, prior to the subprime crisis in 2007, the household leverage ratio was close to 100%. After 2008, the US household sector began a long deleveraging process, while the government and non-financial sectors started leveraging up. As of the end of 2022, the US household sector's leverage ratio was 74.4%, which is closer to the average level of developed economies and has significantly decreased compared to the subprime crisis period.

Moreover, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale. “We simply don’t have enough inventory,” Lawrence Yun, Chief Economist at NAR said. “Will some markets see a price decline? Yes. But with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”

Are Homebuilders Stocks Overheated?

Housing data may be another indicator that can move bond and stock prices other than the unemployment data. One of the most widely watched stats is housing starts.

Higher-than-expected new housing starts can boost housing sector stocks as builders could make more profits from economic growth. Conversely, lower-than-expected start rates in a slowdown with declining interest rates could depress related stock prices and boost bond prices.

Looking into the future, Realtor analysis suggests that the US housing markets are facing a considerable shortage of new homes, resulting from over a decade of under-building in proportion to the growth in population.

However, analysts from The Motley Fool have a positive outlook for the future. They believe the current housing shortage is driving builders to accelerate their construction efforts in order to meet demand. As a result, stock prices may continue to rise in the future.

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