“Our evidence points to abnormal behavior in the US housing market for the first time since the boom of the early 2000s,” the researchers wrote. “The reasons for concern are evident in some of the economic indicators… which show signs that house prices in 2021 appear increasingly out of line with fundamentals.”
Many Americans are still reeling from the last housing crash in 2007, which was prompted by cheap credit and lax lending standards that left millions of homeowners owing more than they’re worth.
But this time economists said they were concerned about a different scenario.
Just because housing prices are going up doesn’t always mean housing is in a bubble. There are plenty of reasons why home prices have risen steadily over the past decade – and have risen even more in the past two years – including imbalances in market demand and supply, rising labor and construction costs and how high or low they are. The researchers noted that mortgage interest rates.
But, they said, prices could rise to a point they call “glut”, as prices increasingly become out of sync with the economic fundamentals that underpin the market.
One possible reason, they suggested, is that buyers may believe prices will continue to rise and fear that they will miss the opportunity to get a lower price for a home now and stumble on paying more later.
This fear of losing influence, or the FOMO effect, can lead to higher prices and increase expectations for higher prices in the future. This could create a self-fulfilling prophecy, the researchers said, in which price growth could become exponential.
The consequences of a glut in the housing market can include expensive homes, investments based on distorted expectations of returns, and lower economic growth and jobs.
The cycle is interrupted when policymakers step in, prompting investors to be cautious and drying up the flow of money into housing. This could cause a housing correction or possibly even a collapse, according to the blog post.
The researchers recommended that policy makers and market participants monitor local markets closely for price spikes in order to better respond, “before the deviations become so severe that subsequent corrections lead to economic disruption.”
The researchers found that as prices rose, signs of abundance appeared. They found that the US housing market showed these signs for more than five consecutive quarters through the third quarter of 2021.
Another indicator the researchers examined is the ratio of home prices to disposable income, which is closely related to affordability. The home-price-to-income ratio is increasing rapidly, but it is not yet abundant, the researchers said.
Much has been learned from the recent collapse in the housing sector, the researchers wrote, which has improved early detection and warning indicators of housing bubbles. If these worrying trends continue, banks, policy makers and regulators must be better equipped to respond quickly to avoid the most negative consequences of the correction.
In addition, they wrote, there is no reason to expect that any resulting correction will affect homeowners or the economy as massively as the recent collapse in the housing sector. Americans are generally in a better financial position, homeowners have stronger equity positions, and excessive borrowing isn’t as rampant as it was in the mid-2000s.
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