Astonishingly low mortgage rates, which the Federal Reserve has driven down in the hopes of stimulating borrowing and goosing the economy, have given qualified purchasers more buying power. A 1 percent decline in mortgage rates increases buying power by about 10 percent.
But some observers, like Zillow Chief Economist Stan Humphries, warn that when mortgage rates inevitably rebound, home price appreciation could slow or even reverse. That could leave buyers who qualify for loans with only minimal down payment requirements—like FHA and VA mortgages—underwater.
Many brokers and agents say they'd rather not see another boom-bust cycle, and advise their clients to enter bidding wars with caution. Even though agents might worry about overvalued homes, that's not stopping buyers from bidding up prices, a phenomenon happening in markets with tight inventories across the U.S.