Could the housing market be in the early stages of yet another bubble? Robert Shiller, co-founder of the closely watched Case-Shiller index on home prices, seems to think so.
“In the housing market, it has its own momentum right now as people see it coming back. We’re sort of in the beginnings of another housing bubble,” the Nobel Prize-winning economist told CNBC in a recent interview.
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In Shiller’s defense, he isn’t the only one to have raised such concerns. Let’s take a look at some of the possible reasons that the housing market could potentially begin to slow down in 2014.
1. Mortgage Rates Could Suppress Home Purchases
Home sales have continued to be healthy in 2013 and showed noteworthy improvements over the previous year. This has coincided with positive jobs data and steady economic growth from year to year. People are simply in a better position now than they were in years prior to purchase a home.
But at the same time, rising mortgage rates are making it more and more expensive to purchase a home. The increase in rates has come in part due to the Federal Reserve’s decision to taper its bond buying program slowly over the course of the next year. The housing market has largely managed to absorb the higher rates as home buyers continue to buy up properties.
What remains to be seen is whether or not that trend will hold going into the New Year. For example, would mortgage rates at or above 5% have a significant impact on people’s decision to purchase a home. Most economists are hoping that the answer to that question is no. If the answer to that question is yes, then cracks may start to appear in what has otherwise been a fairly stable recovery.
2. Living Trends and Energy Prices May Impact the Housing Market
There was once a time when the city was the epicenter of modern society in the United States. People would live and work in the same city in tight-knit communities. During the 20th century the city became a less desirable place to raise a family and home buyers fled to the suburbs where they could commute to the city in order to get to work.
But the financial crisis did much to change that way of life. Rising gas prices and other factors are starting to push people back into the city. Whereas the suburbs were once the center points of American affluence, they could become the slums of tomorrow as more people take residence in America’s cities.
“Things are changing fundamentally and it seems people are less excited about big homes,” said Shiller, referring to housing trends. “The financial crisis kind of put a damper on that enthusiasm, especially big homes far away from the city center. There’s this new urbanism afloat. Housing is not one thing. It’s not monolithic. I think there might be a trend toward more urban living.”
If this trend were to continue, it would undermine the entire basis of most people’s housing investments. Houses that were once thought to be valuable would slowly lose value and leave many people holding an empty bag.
