YouTube:https://youtu.be/17cllVue2-4
Rapid home price increase has some housing market experts wondering if the United States is replicating the early 2000s housing bubble, which resulted in a severe housing crisis in 2006 and the Great Recession the following year.
The answer, according to the Federal Reserve Bank of Dallas, is that the housing market in the United States is displaying signs of a growing bubble.
Due to a convergence of factors, home purchases increased throughout the epidemic. To begin with, millennials have entered their prime home-buying years. Furthermore, the pandemic drove millions of individuals to work from home, forcing some to move out of cities as well as seek out larger homes. The average listing price for a home has risen by 27% in the last two years resulting from this.
A quick rise in home values, of course, does not always indicate a bubble.
However, when there is widespread assumption that today's substantial price increases will continue, real property prices can diverge from market fundamentals. This creates a sense of fear of losing out, which can drive up housing prices and raise expectations of continued price increases.
Fed researchers looked at three home market measurements to determine whether the housing market may have reached a turning point: the exuberance indicator, the net present value of future rents, and the ratio of housing prices to disposable income.
The exuberance indicator is a statistical model that monitors exuberance, or when economic fundamentals cannot explain the rate of increase in housing prices. When this indicator reaches 95%, it means economists are 95% confident that the market is seeing anomalous pricing behavior. The current metric of enthusiasm is 115%.
The economists then examined the sum of the discounted value of future rents. It's comparable to how investors look at discounted future dividends to estimate the value of a stock. The housing market may be in a bubble if home prices are higher than the discounted value of future rents. Unfortunately, this indicator also signals unreasonable optimism, comparable to the build-up during the last housing bubble, which burst in 2006.
Finally, researchers looked at the home-price-to-disposable-income ratio, which is a measure of housing affordability. Fortunately, this metric hasn't reached the threshold of euphoria. However, economists warn that disposable income temporarily may be inflated, as it may have expanded during the pandemic due to both stimulus checks and a decrease in household spending due to lockdowns.
Fortunately, there are a few differences between 2022 and 2006. For example, household finances have dramatically improved and the easy-to-secure "liar's loans" that fueled the previous housing bubble no longer are available.
