Home prices are skyrocketing. Is this another bubble?

About 15 years after a housing bubble triggered the worst U.S. financial disaster since the Great Depression, some observers are expressing concern that the industry has fallen into another bubble.

Housing prices are soaring, despite high mortgage rates that, in theory, should dampen demand and drive prices down.

The share of U.S. homeowners facing serious financial difficulties increased slightly at the start of this year compared to the final months of 2023, real estate data firm ATTOM found in a report this week.

Despite these trends, experts interviewed by ABC News largely dismissed fears of a housing bubble.

Frothy prices and the pressure they put on potential buyers are a cause for concern, they said, but the price rises are due to an old-fashioned imbalance between supply and demand rather than speculation frantic characteristic of a bubble.

“The price increases have been quite remarkable, but they are not caused by any abnormal factor,” Lawrence Yun, chief economist at the National Association of Realtors, told ABC News. “It’s just a matter of supply and demand, the normal reason.”

Two years ago, the Federal Reserve launched an aggressive series of interest rate hikes in an effort to curb inflation. Typically, such a policy would lead to higher mortgage rates and lower house prices as buyers languish under high borrowing costs. In this case, mortgage rates skyrocketed, but prices rose at the same time.

For nine straight months, existing home prices have increased year over year, according to data released by the National Association of Realtors in March. Going back further, the median price of an existing home has jumped nearly 40% over the past four years, according to NAR data.

“It’s a strange market that seems like an anomaly,” Marc Norman, associate dean of New York University’s School of Professional Studies and the Schack Institute of Real Estate, told ABC News. “I definitely see people wondering if it’s a bubble.”

The high prices, however, come from a simple example of too much money chasing too few homes, experts told ABC News.

During the Covid-19 pandemic, residential construction slowed when shortages of materials and workers made input costs more expensive, Norman said. As supply blockages began to ease, the Fed raised interest rates, making it more expensive for developers to borrow the money needed to launch projects.

The slowdown in housing construction has contributed to a housing shortage. Housing supply is 3.2 million short of the amount needed to meet demand, real estate and investment firm Hines said in a report last month.

“We haven’t built enough homes in this country and there’s still a lot of demand,” Christopher Mayer, a real estate professor at Columbia University Business School, told ABC News. “Interest rates have made construction more expensive and homes have become more expensive.”

The current housing shortage stands in stark contrast to the housing bubble that led to the Great Recession, experts say.

At the time, a sharp rise in prices led to a surge in housing construction, which fueled an oversupply of housing. The abundance of housing, in turn, has pushed buyers to acquire a property – or multiple properties – as an enhancing asset rather than as a place to live. When new buyers could not be found and the music stopped, prices collapsed.

Prices are unusually high in today’s market, but the housing shortage is limiting their fall because a lack of options for buyers will continue to drive prices higher, said Ken Johnson, a real estate economist at Florida Atlantic University. told ABC News.

“I don’t foresee a dramatic crash,” Mr. Johnson said, adding that he expects a scenario in the coming months in which house prices stabilize or fall slightly as they increase. testing the limits of consumer budgets. “On a scale of one to ten, with the last bubble being a nine, that equates to two or three.”

Still, Johnson said, possible interest rate cuts could heat up the housing market even further, driving up prices and further threatening the stability of the sector.

On the other hand, Yun raised the possibility of a recession that would lead to layoffs and jeopardize homeowners’ ability to pay their mortgages, potentially flooding the market with housing. Even under such circumstances, he said, “the decline in housing prices would be quite modest.”

Even absent a full-blown bubble, the market could resort to some deflation, Norman said.

“For me, the bigger problem than a bubble is simply lack of affordability,” he added. “Maybe the bubble doesn’t burst, but some air escapes from the balloon.”