Real-time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble

The U.S. housing market has been experiencing a steady increase in real house prices since 2012. This upward trend in prices began before the pandemic but has accelerated since early 2020. Understanding the state of...

The U.S. housing market has been experiencing a steady increase in real house prices since 2012. This upward trend in prices began before the pandemic but has accelerated since early 2020.

Understanding the state of housing markets is crucial for prospective buyers and sellers, as well as policymakers. To assess the health of the U.S. housing market in real time, innovative statistical tools are being used to monitor the emergence of housing bubbles. These tools analyze various factors such as disposable income, the cost of credit, supply disruptions, and rising labor and construction costs to identify potential market exuberance.

It is important to note that rapid real house-price appreciation doesn't necessarily indicate a housing bubble. Economic factors like income, credit, and supply disruptions can contribute to sustained price gains. However, when there is widespread belief that today's price increases will continue, it can lead to a self-fulfilling mechanism where buyers purchase out of fear of missing out, driving up prices even further. This can result in a housing market that becomes misaligned from fundamental economic factors.

Monitoring housing markets in real time for signs of exuberance can help investors and policymakers react before misalignments become severe, potentially avoiding economic upheaval. Time series of real house prices show that episodes of expectations-driven bubbles are nonlinear and result in corrections or even market crashes.

The Dallas Fed's International House Price Database team, in collaboration with a network of scholars, produces datasets and statistics that characterize potential market exuberance. These statistical methods continuously monitor housing markets in the U.S. and around the world to detect symptoms and signal the presence of emerging housing booms.

Currently, the U.S. housing market has been showing signs of exuberance for over five consecutive quarters. The exuberance indicator is above the 95% threshold, indicating abnormal explosive behavior in prices. The gap between the actual price-to-rent ratio and its fundamental-based level has been rapidly growing, comparable to the run-up of the last housing boom. Additionally, the price-to-income ratio has been increasing quickly, indicating that U.S. real house prices may soon become detached from personal disposable income per capita.

While there is growing concern about a potential housing bubble, the underlying causes and risks differ from those during the previous housing boom. Household balance sheets appear to be in better shape, and excessive borrowing doesn't seem to be fueling the current housing market boom. Additionally, the experience gained from the previous housing bubble and the development of advanced tools for early detection and deployment of warning indicators put market participants, banks, policymakers, and regulators in a more informed position to assess and react quickly to the significance of a housing boom.

Overall, real-time market monitoring helps identify signs of potential housing bubbles and allows for proactive responses to avoid severe economic consequences.

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