Current high home prices aren’t quite lining up with the usual contributing factors, according to the Federal Reserve Bank of Dallas, and it’s creating a concerning housing bubble.
Dallas Fed researchers recently published a paper that compared U.S. home prices with the underlying economic factors.
The researchers found that the rising prices are “out of step” with market fundamentals, and they are finding the behavior abnormal for the first time since the market boom in the early 2000s.
According to the paper, rapid home price appreciation doesn’t signal a housing bubble on its own.
Researchers cite shifts in disposable income, supply disruptions, and rising labor and materials costs as typical economic reasons for sustained home price gains.
However, the point of concern, according to researchers, is the fear of potential buyers who think they need to rush into the market or risk being left behind.
This fear is a “self-fulling mechanism,” which can lead to explosive price growth that further separates the housing market from its fundamentals.
The increasing misalignment, according to the paper, can result in distorted investment patterns, bankruptcies, and eventually, a housing market crash.
Despite the data, researchers don’t expect a fallout like the 2007-09 financial crisis.
They say that household balance sheets appear to be in better shape, and excessive borrowing doesn’t seem to be a contributing factor.
In 2007, 7 percent of household disposable personal income was used toward mortgage debt service payments, whereas the most recent figures are at 3.8 percent.
The researchers also say that the experience from the early 2000s housing bubble has resulted in more advanced tools and warning indicators that would help experts respond to a crisis in time.
While the reasons for concern are clear, based on economic factors such as price-to-rent ratios and price-to-income ratios, they also are a result of pandemic-related supply issues and policy responses.
Experts continue to hope that rising mortgage rates can eventually cap home price growth so it doesn’t lead to a bubble burst.
Additionally, a large part of home sales today is a result of investor activity, experts say. Rising rates could also calm down this activity.
Experts agree the housing market needs to find its balance, but are confident it should occur naturally as more and more buyers are priced out of the market.
Until then, those who still want to purchase a home should take their shot, experts say, if the window of opportunity remains open for their personal financial situation and goals.