Home Prices, at Record Highs, Continue Their Rise
Signs of “Exuberance”
The Federal Reserve Bank of Dallas has expressed concern over signs of “exuberance” in the housing market. For over a year, they have observed increases in home prices that do not appear to be driven by fundamentals. These include the home price-to-rent ratios that have risen above historical averages. The increase in this ratio was a red flag prior to the 2008 housing market crash.
Factors Driving Today’s Market
The Dallas Fed recently wrote a blog post concerning the housing market, but did not suggest there is another 2008-style bubble on the horizon. For one thing, regulators have clamped down on the lax lending practices that helped fuel the housing frenzy of that time.
Factors in the current market that may be driving prices up include limited inventory, a growing percentage of investors looking to flip homes at a profit, and rising construction costs. Low interest rates have also played a role as people benefitted from smaller mortgage payments. FOMO (fear of missing out) is also an issue; as prospective buyers observe home prices going up, they may feel compelled to jump in today rather than risk paying more in the future. And with interest rates expected to rise, some homebuyers are finding even more reason to move quickly in order to lock in a lower mortgage rate.
Why This Time Is Different
Since the last housing crash, new regulations and systems have been put in place to limit the damage a housing bubble can cause. The Federal Reserve noted that they don’t expect current market dynamics to cause economic upheaval similar to 2008.
Should there be a downturn in home values, Americans are better positioned to weather the storm due to more robust household balance sheets, including a higher percentage of equity in their homes.
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