Historically speaking, the ongoing housing boom is an anomaly. Over the past two years, US home prices have soared 34.4%—including 19.8% over the past 12 months. For perspective, home prices have risen on average 4.6% per year since 1987.
While the hot labor market has put upward pressure on income—with private sector wages up 4.8% over the past year—it isn’t rising fast enough to account for the uptick in home prices. That disconnect has many in the real estate industry on edge. A housing market that has become detached from economic fundamentals also has more economists posing the bubble question: Are we staring down another 2008-like housing bust?
That’s something economists at Zillow have been researching. On Monday, Zillow published a paper declaring that we are not inching toward a housing bubble or crash. They also argue that housing bubble fears are actually making matters worse and could drive home prices even higher.
“The expectation of another [housing] crash could contribute to keeping homes so unaffordable. Builders have been firing on all cylinders, and with more homes under construction than any time since 1973, they understandably feel exposed in the event of a housing downturn. If they trim their construction plans out of caution, we will miss out on one of the best hopes we have for net new inventory on the market, and the inventory crunch that’s helped push prices up will persist for longer than expected,” write the Zillow researchers.
Simply put: Zillow researchers think if homebuilders reduce production out of housing crash fears, it could keep inventory levels suppressed. Of course, the lack of inventory has been among the major drivers of the ongoing housing boom. The fact that home shoppers far outnumber homes for sale gives buyers little choice but to engage in bidding wars.
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It’s understandable that the ongoing construction and housing booms have so many US homebuilders feeling uneasy. After all, the last US housing crash saw homebuilding go into a decade-long slump. At the height in 2006, monthly new housing starts peaked at 2.3 million. Over the coming years, new home construction kept falling until bottoming out at 478,000 in April 2009. That period put many homebuilders and subcontractors out of business. Firms that did survive were humbled and have since adopted more conservative business approaches.
While Zillow doesn’t believe we’re in a housing bubble, others aren’t so sure. Back in March, the Federal Reserve Bank of Dallas put out a research paper titled Real-Time Market Monitoring Finds Signs of Brewing US Housing Bubble. The Dallas Fed researchers found home prices are rising much faster than underlying economic data should support.
“The gap between the current price-to-rent ratio and its fundamental-based level in the US has grown rapidly during the pandemic—comparable to the run-up of the last housing boom—and started showing signs of exuberance,” write the Dallas Fed researchers. However, they go on to say if a housing correction does come, it shouldn’t resemble the 2008-type crash and the foreclosure crisis that followed. Unlike the 2000s housing bubble, homebuyers are in better financial shape and should be better prepared to weather an economic storm.
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That Dallas Fed paper is hardly an outlier. Over the past month, fortune reached out to researchers at CoreLogic, Moody’s Analytics, and the Real Estate Initiative at Florida Atlantic University to get their regional analysis of US housing markets. Looking at the data through a historical lens, researchers at those organizations tried to answer if local home prices are overpriced relative to local incomes. Researchers at Moody’s Analytics labeled 96% of regional housing markets as “overvalued,” while Florida Atlantic University finds 100% of housing markets are “overpriced.” Meanwhile, CoreLogic’s data (see chart above) labels 64% of regional housing as “overvalued.”
Mark Zandi, chief economist at Moody’s Analytics, agrees with Zillow’s assessment that the US housing market is not in another housing bubble. Zandi tells fortune that a housing bubble requires both home price overvaluation and speculation driving the market upward. While the market is overvalued, he says, it doesn’t appear to be driven up by speculation this time.
That said, Zandi does believe that US home price growth is about to flatline over the coming year as spiking mortgage rates price out more homebuyers. But that economic shock caused by higher mortgage rates will hurt some markets more than others. Zandi predicts that extremely “overpriced” housing markets, like Phoenix and Charlotte, could see 5% to 10% price declines.
Zillow disagrees with Zandi. The home listing site is forecasting that US home prices are poised to rise 14.9% between March 2022 and March 2023. The reason? They believe homebuyer demand, underpinned by a demographic wave of millennials entering the market, will continue to outmatch supply. Even if their forecast proves wrong, they’re highly skeptical home prices could fall by much.
“If prices did begin to fall, we know there are millions of stymied first-time buyers, or younger millennials soon to be aging into that situation, waiting in the wings to snap up homes if they see a bargain,” write the Zillow researchers . “Those first-time buyers will continue to feel the pressure from rising rents, which jumped 17% in just the past 12 months. And a generally high-inflation environment will keep homeownership looking attractive as a hedge against inflation.”
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This story was originally featured on Fortune.com