This you can expect from the real estate market in 2022 0:59
(CNN Business) ––
US home prices have soared to new levels and continue to rise, to the point where some researchers and economists now say they have seen signs of a housing bubble brewing.
Home prices are rising faster than market forces would indicate they should and are "derailing fundamentals," according to a new blog post written by researchers and economists at the Federal Reserve Bank of Dallas.
Until recently, the possibility of a bubble was not widely supported.
But, after looking at US housing markets, Fed researchers said new evidence is emerging.
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"Our evidence points to abnormal behavior in the US housing market for the first time since the crash of the early 2000s," the researchers wrote.
"Causes for concern are clear from certain economic indicators... showing signs that house prices in 2021 appear to be increasingly out of step with fundamentals," they added.
The last real estate bubble
Many Americans are still scarred by the last housing crisis in 2007. A situation fueled by cheap credit and lax credit standards that resulted in millions of homeowners owing more on their homes than they could afford.
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But this time, economists said they are worried about a different scenario.
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The fact that home prices are rising out of control does not always mean that there is a housing bubble.
And there are many reasons why home prices have risen steadily over the last decade, and soared even more significantly in the last two years.
These include supply and demand imbalances in the market, rising construction and labor costs and how high or low interest rates are for a mortgage, the researchers said.
But, they explained, prices may be reaching a point they call "exuberance," where prices are increasingly out of sync with the economic fundamentals underpinning the market.
What are the reasons?
In that sense, they suggested that a possible reason is that buyers may believe that prices will continue to rise.
And that leads them to fear that they will miss out on a lower price on a home now and end up paying a higher price later.
This fear of missing out (FOMO) effect can drive prices higher and raise expectations of higher prices in the future.
Which, in turn, can create a self-fulfilling prophecy, the researchers said, in which price growth can turn out to be exponential.
Among the consequences of the exuberance of the real estate market are overvalued homes, investments based on distorted expectations of profitability and reduced economic growth and employment.
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The cycle is interrupted when politicians step in, prompting investors to be cautious and causing the flow of money into housing to slow.
Which could cause a correction in home prices or possibly even bankruptcy, according to the blog post.
The researchers advised policymakers and market participants to watch local markets closely, looking for price spikes so they can better respond.
Precisely, "before the imbalances become so severe that subsequent corrections produce economic disturbances," they warned.
Is a housing bubble brewing?
The behavior of home buyers and sellers over the past two years has been anything but normal, the researchers noted.
Prices have reached all-time highs and continue to rise, because there is also an all-time low in inventory.
Still, homebuyers keep buying.
Interest rates fell to record lows during the pandemic.
But, that alone does not explain the housing market frenzy, they wrote.
Other factors have played a role in pushing the housing market into bubble territory, the Fed researchers wrote. They include pandemic-related stimulus programs and supply chain disruptions linked to Covid-19.
In addition to the political responses associated with those two points.
The researchers specifically highlight the role of investors, who are aggressively buying homes.
Investors now buy 33% of US homes, a 5% higher share than the average over the past decade, according to John Burns Real Estate Consulting.
The business of "ibuying" –– in which a company buys a house for cash to lightly fix it and resell it again–– represents only 1.7% of the national housing market in the last quarter of 2021, according to Zillow.
But, in some cities, the proportion of homes that are destined for buyers of this style reaches 11%.
signs of exuberance
The researchers found that as prices rose, signs of exuberance emerged.
The US housing market has been showing these signs for more than five consecutive quarters through the third quarter of 2021, according to their findings.
Fed researchers also looked at the relationship between home prices and rents.
They found that since 2020, the home price-to-rent ratio has skyrocketed beyond what market fundamentals can explain.
And, precisely, it began to show signs of exuberance in 2021.
Another indicator the researchers evaluated was the relationship between house prices and disposable income.
Something that is closely related to affordability.
This home price-to-income ratio is rising rapidly but is not yet exuberant, the researchers said.
The good side
Much was learned from the latest housing bubble, which has led to better early detection and warning indicators, the researchers wrote.
If these worrying trends continue, banks, policymakers and regulators should be better prepared to react quickly.
And thus avoid the most serious negative consequences of a correction.
Furthermore, they wrote, there is no reason to expect any resulting correction to affect homeowners or the economy as significantly as the last housing crisis.
Americans are generally better off financially, homeowners have stronger capital positions, and excessive borrowing is not as rampant as it was in the mid-2000s.
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