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Federal Reserve Bank of Dallas Says a Housing Bubble is Imminent

Homebuyers who put their search on hold last year in anticipation that 2022 would be friendlier aren’t happy: On Tuesday, we discovered that YoY housing price growth in the United States accelerated to 19.2 % in January. This compares to an 11.3 % increase in the same period a year ago. The most recent increase is also significantly higher than the peak yearly rate (14.5 %) seen ahead of the 2008 housing crisis.

The persistently booming property market is starting to raise questions. This was spelled in a recent Federal Reserve Bank of Dallas paper titled “Real-time market monitoring finds signs of brewing US housing bubble.” After comparing US home prices and fundamental economic data, the researchers concluded that there is a looming bubble.

Dallas Fed researchers pointed to evidence of aberrant behavior in the housing market for the first in over two decades. The research indicated that some economic indicators provide a reason for worry as housing prices seem to stay clear of fundamentals.

Traditionally lower mortgage rates and an upsurge of first-time younger homebuyers aided the continuing housing boom at the back of the pandemic. However, this is insufficient to explain the recent surge in housing prices. According to the researchers, some other factor spurring the surge is the worry of missing out if they don’t act quickly. However, this is concerning since FOMO property purchases were crucial to the previous housing bubble.

However, there is good news. Whereas the Dallas Fed sees a booming real estate sector, they don’t believe we’re verge of another 2008-style crisis. To begin with, today’s families are in such good shape. Loan repayments accounted for 7% of disposable personal income in the United States in 2007. That figure was only 3.8 % at the time of the most recent reading last year.

The researchers added that based on current information, there isn’t any reason to believe that the consequences of a property correction will be equivalent in size or macroeconomic force to the global economic crisis of 2007–09. Consumer balance sheets seem to be in good shape, and excess lending does not support the property market bubble.

Currently, sector insiders are optimistic that the surging mortgage rates can assist in taming runaway housing price increases before the prices get out of hand and result in a bubble. In the past 12 weeks, the average 30-year housing loan rate has increased to 4.42% from 3.11%.

Last week John Burns Real Estate Consulting research vice president Devyn Bachman said that should the rates go beyond 5%, it would price buyers out of the market. He explained that high rates will likely discourage investors’ activity, accounting for today’s colossal junk property sales.

Ahead of the 2008 crisis, mortgage rates had surged in 2006. The high mortgage rates at a period when most families had flexible mortgage rates ultimately accelerated the demise of numerous subprime mortgages. This set the stage for the 2008 financial crisis.

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