The American real estate bonanza that surged in the early 21st century and came to a crashing end in 2008 could be forming once again.
The Dallas Federal Reserve published a report on March 29 stating real-time monitoring of the housing market shows signs of speculative price inflation in major metropolitan areas across the United States, possibly leading to another housing bubble.
Dallas Fed researchers used statistical methodologies to monitor real estate activity and its impact on home prices as they unfolded. In October 2020, the Dallas Fed, in collaboration with the International Housing Observatory, introduced a tool called the R Package Exuber based on algorithms that can detect signs of emerging bubbles.
According to the Dallas Fed’s report, “Shifts in disposable income, the cost of credit and access to it, supply disruptions, and rising labor and raw construction materials costs are among the economic reasons for sustained real house-price gains.”
However, housing market fundamentals do not always correspond to trends in home pricing. What researchers are concerned about is a phenomenon called “price exuberance,” which frequently happens on Wall Street when stocks are overbought. Their exorbitant prices are the result of “fear of missing out” (FOMO), hype, and speculation.
If prospective buyers believe that the current pace of property value appreciation will continue, their FOMO can influence their real estate decisions, driving up prices.
“The statistic close to the threshold during 2021 indicates that U.S. real house prices may soon become untethered from personal disposable income per capita,” the Dallas Fed said.
Early signs of a housing bubble driven by price exuberance began in late 2020. Over the last five quarters, the R Package Exuber has registered this trend.
Historic data reviewed by the Dallas Fed indicates this is the first time since the early 2000s that the American housing market has exhibited this behavior.
Researchers are concerned about two other variables: the price-to-income and price-to-rent ratios. Both are currently higher than they were at the height of the previous bubble in 2005.
Economists at Florida Atlantic University agree with the Dallas Fed assessment, and they have identified regional markets where FOMO and aggressive speculation create price exuberance. Austin appears near the top of the list in Texas, while Dallas-Fort Worth is at No.19.
The most overpriced market is in Boise City, Idaho, where historical pricing trends suggest that buyers should be paying less than $300,000 for two-bedroom homes. Still, current real estate listings feature prices near $513,000 on average.
Some of the other most overpriced markets as of March 2022 include Atlanta, Charlotte, Las Vegas, and Phoenix.
While the prospect of another real estate bubble in the U.S. is undoubtedly worrisome, economists at the Dallas Fed do not believe that the market will face a situation like the global financial crisis of 2008.
Financial regulators and lawmakers have the advantage of real-time reporting to let them decide when they should intervene to prevent another financial crisis.
Mortgage lending rules and practices have also changed significantly since the days of subprime loans; moreover, the prospect of rising interest rates should cool things off in the housing market.