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Record-Low Mortgage Rates Steer Housing Demand

More than 77% of homebuyers and sellers believe there’s a housing price bubble in the area where they live, according to a survey in a new report from Redfin. Historically rapid home-price growth has made homebuyers and sellers worried, although Redfin experts say rising mortgage rates and buyers who can afford their homes are preventing a bubble. 

A housing bubble is characterized by rapid, unsustainable growth in home prices that eventually “burst” when demand no longer supports high home values, followed by steep price declines. These instances are typically caused by an influx of demand from homebuyers and real estate investors. Meanwhile, 44% of real estate agents believe there’s a housing bubble in the market where they work. 

“What we’re going through right now is closer to a ripple in the water than a bubble,” said Redfin Chief Economist Daryl Fairweather. “Mortgage rates are already going up, which will likely stabilize demand and reduce the risk of a bubble that could burst.” 

The housing market has been extremely competitive as the coronavirus pandemic turned American society upside down in 2020, resulting in an increase in remote work and record-low mortgage rates that have steered strong homebuyer demand and a severe supply shortage.  Median home prices grew by double digits all of 2021 as Americans were continuously moving to new parts of the country and new neighborhoods for affordability. 

“Homebuyers and sellers are rightfully concerned about how fast prices are rising, especially those who remember the housing market crash during the Great Recession,” said Fairweather. “If this rate of price growth were to continue for another year, I would be worried about a bubble, too, but I predict home-price growth will slow significantly in 2022.  

Fairweather also mentioned that inflation, which reached its highest level in 40 years at the end of 2021, also poses the risk of a housing bubble. With the prices of goods and services significantly higher than they were last year, people have less disposable income to put into the housing market. The average 30-year mortgage interest rates have risen roughly 0.5 percentage points since the beginning of 2022, landing at 3.56% in the week ending January 20, and are projected to continue increasing. 

“The housing market is much stronger than it was before and during the Great Recession,” Fairweather said. “There’s a very low likelihood that home prices will go down anytime soon.” 

The pandemic-driven housing surge is much different from that of the mid-2000s, when lending criteria allowed many homebuyers to take out mortgages they couldn’t afford. That resulted in millions of foreclosures and a sharp decline in home prices. Today’s lending practices and servicers are much stricter, ensuring that buyers can afford their monthly payments with no hassle.   

To read the full report, click here.

About Author: Demetria Lester

Demetria C. Lester is a reporter for DS News and MReport, with more than six years of writing experience. She has served as Editor-in-Chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington. She has covered events such as the Byron Nelson, Pac-12 Conferences, the Women in Dallas Film Festival, to freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, she is an avid jazz lover and reader. She can be reached at demetria.lester@thefivestar.com.
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