Apparently, there’s not even so much as a bubble in today’s market. Len Kiefer, deputy chief economist at Freddie Mac, recently explained to Forbes why the US housing market is not currently encased in such a bubble.
“A bubble has three defining characteristics: price growth is driven by speculation, bubbles are fueled by credit expansion, bubbles pop,” Kiefer told the magazine. “While house prices grew at record rates in 2021, the reasons for the increase were not primarily speculation or credit expansion, but rather record-low mortgage rates and a fundamental shift in housing demand.”
Yet some economists believe a bubble could emerge – not contingent on market forces but in disenfranchisement from economic reality based on buyers’ psychology. Shifts in disposable income, 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, the Federal Reserve Bank of Dallas explained in a report published last year.
Borrowers should not act on fear
“But real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue,” the bank’s economists cautioned. “If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains.”
The Federal Reserve Bank of Dallas warns that this “self-fulfilling mechanism leads to price growth that may become exponential (or explosive), resulting in the housing market becoming progressively misaligned from fundamentals until investors become cautious, policymakers intervene, the flow of money into housing dries up and a housing correction or even a bust occurs.”