Home prices 'will see big declines in coming years,' expert predicts
Despite four record-breaking increases in a row, home prices could, according to an expert, initiate a trend reversal in the next few years.
"Chances are we will see big declines in the years to come," Yale economics professor Robert J. Shiller told Yahoo Finance Live. "I think people are concerned at this point in the story."
House prices rose 19.7% year-over-year in July, up from 18.7% in June for the fourth straight month of record growth, according to the S&P CoreLogic National Case-Shiller House Price Index. The 20-City Composite grew 19.9% in July, up from 19.1% the previous month and just below analysts' expectations of 20% annual earnings, according to consensus estimates from Bloomberg.
"The timing is surprising," said Shiller. "It started in a recession. We should be depressed and yet we seem to be exuberant in the market."
The three drivers of home prices
Shiller highlighted several factors driving the recent rise in home prices. First, mortgage rates are near historic lows and have been throughout the pandemic.
According to Freddie Mac, the 30-year fixed-rate mortgage rate - the most common among homebuyers - was 2.88% last week. The rate hit an all-time low of 2.65% in January of this year.
"That is partly due to the low interest rates and Fed policy, of course," he said. "But it's so ubiquitous ... I think it has something to do with our psychology at this point in history that might emerge from a COVID-19 pandemic."
A home for sale will be on display in Houston, Texas on August 12, 2021. House prices have risen during the pandemic as low interest rates and working from home have become more common. (Photo by Brandon Bell / Getty Images)
He noted that during the pandemic, many people may feel frustrated, forced to work and study from home, and buying a home equates to action.
"We want to do something," he said. "So that seems like let's upgrade our house. '"
Most recently, Shiller said that FOMO - or fear of missing out - could be behind many decisions made by homebuyers to enter the market while anxiously watching prices accelerate.
"And so, after all, people give in and buy and that's what drives them," he said. "It's an unstable situation."
Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.
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