The supply of new homes in Southern U.S. states has surged significantly, potentially creating a bubble in the housing market, a real estate analyst suggested on Monday.
Imminent Housing Bubble Burst in Southern U.S., Expert Warns
Increased Construction Amid Pandemic Demand
Home builders in the Southern states ramped up construction in response to the heightened demand for homes during the COVID-19 pandemic. Many Americans relocated to the South seeking more affordable housing after remote work became widely feasible due to stay-at-home orders aimed at slowing the virus's spread. However, this trend is now slowing, resulting in decreased demand for homes.
During the pandemic, cities like Austin, Dallas, and Nashville saw an influx of new residents attracted by relatively low housing costs and the appeal of larger living spaces. This demand surge prompted builders to rapidly increase the construction of new homes to meet the growing need. According to housing market reports, this period saw record numbers of building permits issued and homes being completed at unprecedented rates.
Potential Housing Bubble
Despite the initial surge, the market dynamics are shifting. One analyst suggests that the drop in demand has left many homes on the market, creating a potential bubble.
“A massive housing bubble has developed, and is about to pop, in the South. The number of new homes for sale in the Southern Region (FL, GA, TN, TX, etc.) has spiked up to nearly 300,000,” said Nick Gerli, CEO of Reventure Consulting, in a post on X, formerly known as Twitter. “This is the highest level of all-time. Even higher than the previous bubble peak in August 2006, before the massive crash.”
The data from Gerli's analysis shows that this inventory buildup is not just a temporary fluctuation but a significant indicator of market imbalance. The Southern housing market's rapid expansion is now revealing vulnerabilities that could lead to sharp corrections if not addressed.
A massive housing bubble has developed, and is about to pop, in the South.
The number of new homes for sale in the Southern Region (FL, GA, TN, TX, etc.) has spiked up to nearly 300,000.
This is the highest level of all-time. Even higher than the previous bubble peak in August… pic.twitter.com/bVB9vCQl4I
— Nick Gerli (@nickgerli1) July 8, 2024
Impact of Declining Demand
Gerli further suggested that the COVID-19 inspired demand led to high prices, which are now declining as demand for homes decreases. The rush to acquire property during the pandemic drove prices to record highs, making it increasingly difficult for local buyers to afford homes.
“I know this sounds very bearish on Southern real estate. But ultimately it's pretty simple. Home builders and investors rampantly speculated in this housing market over the last 3-4 years. Prices went far above what locals can afford, creating a bubble,” he said on X. “Now that bubble is – slowly – popping. And it could start to pop pretty fast if a recession is thrown into the mix.”
The potential recession Gerli mentions could exacerbate the market correction. If economic conditions worsen, potential homebuyers may delay purchases, further reducing demand and putting additional downward pressure on prices. This could lead to a more accelerated and pronounced market adjustment.
Market Normalization
Some housing economists propose that the market may be normalizing after the volatility experienced during COVID-19, when cheap mortgage rates and lower prices in the South attracted buyers. The Southern housing market, once characterized by rapid growth and high demand, is beginning to stabilize as market forces rebalance.
“In our data, it is clear that the Southern markets are the most normalized. In Austin and San Antonio, for example, there are more homes now for sale than there were before the pandemic,” Danielle Hale, chief economist at Realtor.com, told Newsweek. “So there is greater availability in the South, and we are seeing that affect pricing.”
The median listing price in Austin, for instance, was down 3 percent compared to a year ago, she added. This decline in prices indicates that the market is adjusting to the reduced demand, aligning home prices more closely with what buyers are willing and able to pay.
Southern Market Resilience
The U.S. still needs to build enough homes, and the South has done a better job than other parts of the country in supplying new homes to the market, Hale noted. The Southern states have been more proactive in addressing the housing shortage by ramping up construction efforts.
“It has also attracted a lot of households from other regions of the country because homes there remain affordable,” she said. “My expectation is that it will continue to draw in people and that its relative affordability will continue to be an advantage.”
Hale added, “So I don't think we're going to see a crash, but it is the case that inventory of homes for sale are less scarce in the South now than they have been over the past few years.”
Equity and Market Stability
Compared to the housing crash during the 2008 financial crisis, homeowners now have significant equity in their homes, including in parts of the South. This equity acts as a buffer against potential market downturns, reducing the risk of widespread foreclosures.
“Historically, Florida, for example, has a high share of homeowners that own their home outright,” Hale said. “Nationwide, there's a lot more equity in housing right now, making it less likely we'll see the kind of price declines that led to trouble in the mid-2000s.”
This equity provides homeowners with more financial stability and flexibility, allowing them to withstand market fluctuations better. It also means that even if prices decline, many homeowners will not be underwater on their mortgages, reducing the likelihood of distressed sales and foreclosures.
Regional Variations
Gerli acknowledged that other regions of the U.S. are experiencing fewer challenges than the South. The Northeast and Midwest, for example, have not seen the same level of speculative building and price inflation.
“We won't see a housing crash in the Northeast and Midwest. Home building there is at very low levels. As is speculative inventory activity,” he pointed out on X. “Prices in these regions are also less overvalued. And inventory is much lower.”
He added, “Perhaps there's a housing correction eventually in Northeast/Midwest. But for now – these markets are holding strong.”
The more conservative building practices and stable market conditions in these regions have kept them insulated from the extreme fluctuations seen in the South. While they may not experience the same rapid growth, they are also less likely to face severe corrections.
Summary: To sum up, the Southern U.S. housing market is at a critical juncture. The rapid growth driven by pandemic-era demand is now revealing potential vulnerabilities. While some experts suggest the market is normalizing, others warn of an imminent bubble burst. The region's future will depend on how demand stabilizes and whether economic conditions support continued housing market growth without significant corrections.
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