Market Extra: Surging U.S. housing market faces test as people start heading back to offices

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What’s keeping traders up at night?

Worries about potential bubbles in U.S. stocks and the housing market have emerged as key concerns for traders thinking about the second half of 2021, according to a recent TD Ameritrade and Charles Schwab survey.

More than 80% of the 500 traders surveyed said they through it was likely that both housing and stocks already were in a bubble.

“The one thing about housing is, I think it’s coming up to a test in the next few months,” said JJ Kinahan, chief market strategist at TD Ameritrade, on Tuesday during an outlook briefing and talk on the survey’s results.

“Your back-to-work days at the office may be different,” Kinahan said of the next few months as the pandemic threat subsides, even though he also expects most companies to remain wary about calling everybody “back into the office, every single day,” for at least the next year.

Instead, such policies likely will “ebb and flow,” he said, until companies figure out where they will land on the subject of flexible work arrangements.

But until workers have more clarity on employer flexibility, Kinahan said it’s hard to guess how well prices for homes in suburbs, rural towns and warm-weather destinations that “absolutely exploded” during the pandemic will hold up.

“The test is, now, will those areas retain their values as we head forward,” he said. “Will people’s lives be flexible enough?”

The talk of potential froth comes as home prices climbed 13.3% in March from a year prior, the highest annual gain since December 2005, according to one gauge, underscoring the significant imbalance between U.S. housing supply and demand.

Goldman Sachs analysts pegged home prices in Boise, Idaho, as 29% higher in April from the previous year, and up 17% in Phoenix, while also forecasting baseline home price growth of 6.8% in 2021 and 3.9% in 2022.

“I don’t think it’s a bubble everywhere,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab, during the briefing. “But when you hear about prices going up a minimum of 20% in some cases, and even 100% on a year-over-year basis, that’s clearly a problem.”

But Frederick also pointed to other factors at play, including skyrocketing copper HG00, -0.09% and lumber LB00, -2.92% prices due to pandemic supply-chain bottlenecks, which could ease with time.

Read: Why so many commodities, including lumber and iron ore, have climbed to record highs

“You used to be able to build 10 houses for the same cost of lumber you can build two today,” Frederick said.

On the flip side, the pandemic also showed that many people who “work over a computer” can live almost anywhere, rather than having to flock to big cities for job opportunities.

The trend could entice homeowners to move back to a hometown, nearer to elderly parents or even to more rural and affordable settings, he said.

Related: Rural America now has a mutual fund dedicated to its long-awaited revival

“Yes, there are some areas of the country where I think prices have gone up too fast,” Frederick said. “They will probably come back down. They will probably level out in some other areas.”

Factors that could keep prices elevated include the current home-supply shortage, and also the flood of investors looking to snap up homes to rent for income.

On the financing side, however, 30-year mortgage rates that hit record lows earlier this year have been creeping higher, at about 3% at last check. The Goldman team expects rates to inch even higher, to 3.2% in June and to reach 3.3% by year’s-end.

That compares with a 20-year national average of nearly 5%, according to LPL Research.

“I don’t think we’re looking for a wholesale housing collapse like we have seen at times in the past,” Frederick said. “But I think a lot of this stuff is going to be a little bit hectic, probably through the remainder of this calendar year.”

In stocks, it could be a bumpy summer, with volatility potentially rising as volumes typically fall during the prime vacation months.

The S&P 500 index SPX, -0.21% and Dow Jones Industrial Average DJIA, -0.24% finished Tuesday slightly lower, but still less than 1.5% away from their record closes in early May. Both have surged roughly 85% from their bear-market lows of March 2020, according to Dow Jones Market Data.

“That’s not surprising that people are going to feel like we might be in a bubble,” Frederick said. “But remember, we were coming off the sharpest, quickest bear market we’ve ever had in history.”