US central bank warns of housing bubble — Analysis
Surging home prices are “unhinged” from market fundamentals, but correction won’t be as devastating as 2007-2009 crisis, Fed says
The Federal Reserve Bank’s Dallas branch has warned of a “brewing US housing bubble,”Saying that market fundamentals have not supported the price rise, creating the risk of market collapse.
“There is growing concern that US house prices are again becoming unhinged from fundamentals,”In a report published earlier in the week, Fed economists stated that they expect inflation to remain at record levels. “Our evidence points to abnormal US housing market behavior for the first time since the boom of the early 2000s,”They added.
This boom came before a crash, which in turn triggered the global financial crisis of 2007-2009. However, if the current bubble bursts, it wouldn’t likely cause as much economic fallout because consumers aren’t as financially overextended as they were in the early 2000s, and excessive borrowing doesn’t appear to be fueling the current price rally, the Fed said.
Low interest rates and an imbalance in supply-demand were two factors that led to the potential bubble, according to the bank. A report by Realtor.com this week shows that the median US home has increased 14% over the past year to $405,000. There are currently only two homes for sale out of five that were available at the start of the Covid-19 pandemic.
As they did back in the 2000s, buyers bet that the prices will continue to rise so they have to compete for available homes. Or they might miss out on the real-estate boom. Prices rising “may have fueled a fear-of-missing-out wave of exuberance involving new investors and more aggressive speculation among existing investors,”According to the Fed.
Fed employs a statistical model that tracks buyer exuberance to identify overheated market, and a 95% confidence threshold typically signals. “abnormal explosive behavior.”It is at 115% right now, its highest point since 2007. Other measures such as price-to rent and price-to income ratios have been shown to show a decoupling between housing prices and market fundamentals.
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The 2007-2009 crisis came when price gains stalled, pulling the rug out from securities backed by mortgages given to buyers who couldn’t afford to make their payments. The mortgage rates could prove to be a major problem this time, as they have risen at the fastest rate in more than 10 years and are at a 3-year high. Many potential buyers are being pushed out of the market by these rising rates.
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