House prices have soared around the world as a result of low inventory and rising demand, raising concerns about how long the hot market can last.
What’s going on: The Global House Price Index of the International Monetary Fund, which tracks 57 countries, has surpassed its previous high from 2008. According to Oxford Economics, house prices in many major economies are increasing by more than 10% year on year.
Stocks in the sector are soaring as a result of the frenzy. In 2021, the iShares exchange-traded fund that tracks residential real estate is up 23%, far outpacing the S&P 500.
The stock of AvalonBay Communities (AVB), a company that develops and manages apartments across the United States, has risen by 31%. Invitation Homes (INVH), a company that owns and operates single-family homes in the United States, has increased its stock by 26%.
There are numerous tales of madness. Real estate agents told CNN Business about increasingly rabid methods clients have used to secure properties, including bidding $1 million over the asking price and paying a competing bidder hundreds of thousands of dollars just to walk away.
This week, one agent in Colorado Springs listed a home for $590,000 that she called “every landlord’s nightmare.” It’s still expected to sell for more than $600,000, with the majority of the money coming in cash.
Vacation homes are also selling quickly. According to a report from the National Association of Realtors, sales increased by 16 percent in 2020 compared to the previous year. And the trend has continued into this year, with sales up 33% so far this year compared to the same period last year.
Here’s something new: Houses were on the market for an average of only 16 days in May, according to Redfin, an online real estate brokerage. At the same time, an all-time high of 54 percent of homes sold for more than their asking price.
Intense bidding wars, lumber supply shortages, and the possibility of higher interest rates are all threatening to derail the market. According to a government report released on Wednesday, housing starts and building permits for May were lower than expected.
And some are sounding the alarm, despite the fact that analysts claim the market is in better shape now than it was in the run-up to the 2008 financial crisis, thanks to tighter lending standards.
When borrowing costs start to rise, Bloomberg Intelligence economist Niraj Shah wrote earlier this week that the market will “face a critical test.” Due to concerns about inflation, the Federal Reserve indicated on Wednesday that it may raise interest rates sooner than expected (which Oxford Economics notes have been made worse by the boom in housing prices).
The good times, according to Lennar (LEN), a Miami-based home builder, aren’t over yet. In its earnings report this week, the company stated that its backlog and new orders for homes remain strong. The news sent its stock up 3.6 percent on Thursday.