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No one seems to be worried about a real estate bubble. Just like the last time the bubble burst


House prices are skyrocketing to new records with no end in sight. They are fueled by historically low interest rates, but also by the conviction of investors and economists that the housing market has a unique ability to support uncontrollable prices.

This is the current state of the US real estate market, but it could also describe the US housing bubble that inflated from 2004 to early 2007, before prices collapsed and wreaked havoc on the economy. and the global financial system. This led to the Great Recession, the biggest blow the US economy has taken since the Great Depression. It produced massive and prolonged unemployment and the greatest destruction of household wealth in the history of the nation.

Most economists and investors are not currently focusing on the housing market. Their focus is on other factors weighing on the economy, such as a labor shortage, decades of high inflation, supply chain disruptions and of course the ongoing pandemic. , which was at least in part the cause of all these problems.

The good news is that few economists believe the current rise in house prices is a bubble about to burst, dragging the economy with it.

The bad news is that hardly anyone worried about the housing bubble in 2007 either.

Few saw the last bubble in time

Former Federal Reserve Chairman Alan Greenspan insisted in 2005 that there was no bubble. Instead, he said America had a large number of small bubbles in some domestic markets scattered across the country.

“Although a nationwide house price ‘bubble’ does not seem likely, there does appear to be, at a minimum, signs of foaming in some local markets where house prices appear to have reached unsustainable levels. “, did he declare. said in testimony to Congress on June 9, 2005.

He was not alone in his assessment.

Mortgage-backed securities, assets secured by payments due on home loans with questionable underwriting rules, were given top ratings by rating agencies.

Economists and investors widely believed that questionable lending practices would be covered by rising home values, allowing borrowers to sell the homes for a profit and pay off the loan if they couldn’t afford the payments. Wall Street companies and banks have rushed to buy these securities.

A construction boom in the early years of this century helped fuel swelling home inventories and high vacancy rates. Still, economists believed the increasing pace of homeownership meant there was an almost endless supply of buyers who would be able and willing to pay, despite soaring home prices.

But, of course, the price increases have ended. In February 2007, home prices would begin to fall, losing 26% of their value before hitting a low, according to the widely followed S&P CoreLogic Case-Shiller National Home Price Index.

Have people learned their lesson? Maybe not.

House prices are rising faster, higher than during the bubble

The previous record for rising home prices was a 14.4% year-over-year gain in fall 2005, according to Case-Shiller. The US real estate market topped that mark in April of this year, with a new record set every month since. Year-over-year price increases now stand at 19.9%.

The median price of existing homes now stands at $ 352,800, according to the National Association of Realtors.

Home values ​​are a third higher than the peak of the last bubble in early 2007, reports Case-Shiller. And by just about any measure, housing affordability has plummeted, even as near-record mortgage interest rates have kept home payments under control.

And yet, economists predict even more price increases to come. Zillow predicts that increases in domestic home prices will slow down but not start to decline. It is growing by 13.6% from September 2021 to September 2022, a faster rate of increase than its previous forecast. Goldman Sachs predicted earlier this month that prices would rise another 16% by the end of 2022.

The belief is that the prices are not going to collapse this time

This is enough to cause PTSD, or at least déjà vu, in those who lived through the last real estate bubble. Yet many of those who sounded the alarm last time don’t think we’re going to see a repeat of the catastrophic bubble burst this time around.

“I don’t think we’ll see prices drop 20% to 30% again,” said Dean Baker, senior economist and co-founder of the Center for Economic Policy and Research. “I don’t think there is that kind of story there.” But he warned that even a modest hike in interest rates could cause home prices to drop between 5% and 8%. The Federal Reserve expects it to start cutting back on the support it provides to the economy soon.

Mark Zandi, chief economist at Moody’s Analytics, said he was concerned the housing market could have a hard landing. But the market and the economy won’t collapse like last time, he expects.

“The housing market is out of whack. It is not sustainable. It is overvalued, stretched and vulnerable because [mortgage] rates go up and affordability is crushed, ”he said. “But I’m not worried we’re going to crash. “

House price increases will level off, declining in some parts of the country while gaining modestly in others.

Zandi, Baker and others believe that much stricter underwriting standards on the overwhelming majority of home loans today will prevent a repeat of 2007. And the homebuilding boom of the early years of this century is also absent. – there is no surplus housing stock and no high vacancy rate. In fact, vacancy rates are near record lows, not records.

However, Ivy Zelman, CEO of Zelman Associates, perhaps the most bearish expert in the current housing market, believes the so-called housing shortage is an illusion.

She believes these estimates ignore broader trends like slowing population growth and low rates of new household formation.

She thinks the current pace of construction may already be a little faster than needed. She fears that with the number of constructions underway, thanks to the entry of outside investors into the market, there may soon be a glut of homes on the market.

But Zelman doesn’t believe there will be another collapse in house prices like the last time. She said an increase in the 30-year fixed-rate mortgage from the current 2.9% to around 4% could be enough to bring prices down.

“A lot of what we are seeing is scary,” she said. “We don’t know what will happen with the interest rates. Some manufacturers say: “We have no more waiting lists”. But a lot of people drink Kool-Aid and get complacent. “

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