Could the Housing Market Be Too Hot?

A recent Bloomberg article reports that homebuilder stocks outperformed all other groups last year, offering different points of view and metrics regarding whether the market might be reaching pre-bubble levels.

On the one hand, it says, “there are plenty of reasons to be optimistic,” citing the housing needs of millennials and baby boomers as factors expected to fuel demand in the coming years “if employment remains strong.” There has also been an uptick in first-time home buying over the past year. However, the article offers comments by money manager James Stack, who predicted the housing crash in 2005: “It is 2005 all over again in terms of the valuation extreme, the psychological excess and the denial.” Stack argues that, historically, a steep run-up in housing prices fueled by low interest rates followed by a series of rate increases has exposed “rot in the woodwork” and prompted loan defaults. The Fed’s projected rate increases this year, says Stack, “raises the risk that today’s highly inflated housing market will again end badly.”

According to the article, tax reform represents a wild card “which could cut both ways for homebuilders”—while the standard deduction will be doubled, the mortgage deduction will be capped, and property tax deductions will be limited, which could harm the more expensive real estate markets.

Lawrence Yun, chief economist for the National Association of Realtors, says, “The housing market has been doing relatively well during the recovery. But 2018 will be a year where we begin to see some change.”