Moody’s Finds 'Little Evidence' of a Housing Bubble

While home prices are responding to higher mortgage rates, there is “little evidence of a housing bubble that is about to burst,” according to a new report from Moody’s Analytics.

The lowest tier of the housing market appreciated by 17.2% in the past year alone, placing an extreme burden on first-time buyers. And as the Federal Reserve continues quantitative tightening and interest rate hikes, mortgage rates have ticked up sharply already in 2022, and are now more than 2.5% higher than the lows to which the American homebuying public had grown accustomed.

“Climbing mortgage rates, coupled with already unaffordable housing, especially for first time buyers, will finally crack housing demand,” Moody’s analysts note in a new whitepaper. They say the “extreme price gains” observed last year have led to housing prices that are 21% overvalued by the end of 2021. By way of contrast, homes were 24% overvalued at the peak of the housing bubble.

But “lower demand and increasing supply will lead to moderating house prices,” the analysts say. “ While investor purchases have taken off, we still have not seen the extreme speculation and overbuilding that inflated the housing bubble in the mid-2000s.”

Moody’s analysts are also keeping close tabs on investor purchases, which are becoming an increasingly larger part of the homebuying market. In the first quarter, they accounted for 18% of all arms-length transactions.

Noting that there has been a “general shift” among investors to buy and hold single-family housing, Moody’s economists say investors are generally assuming less risk than in house flipping: “profiting off the intrinsic value of the house drives rental property investment and discourages drastically overbidding on the property,” they write. During the housing bubble, flips as a percent of repeat sales were at 17%.  Today, that figure stands at 9%.

“There appears to be little evidence of a home price bubble, given how flippers remain at bay,” the report states. The analysts also say demographics are stronger now than 15 years ago, as there are more people in “prime homebuying age” than in the mid-2000s.

“While demand will moderate–assuming there is not a recession–it will not completely collapse,” the report says. “There is currently a severe housing shortage… (and) additional supply will not flood the market as it did before the Great Recession. Supply chain disruptions, labor supply, and high commodity prices have all slowed new home construction. These forces will lead to a more moderate decline in house prices in the next few years…There will be modest price declines in 2023, and then prices will mostly move sideways for the next few years.”