In 2005, Federal Reserve Chairman Alan Greenspan told Congress: “The United States as a whole is unlikely to experience a housing price bubble.” Information, the bubble is close to its peak.
Fast-forward to 2022, and precisely because of the lingering fears of the last bubble, economists are not afraid to admit it exists this time around—even if they think it may not be as dangerous as the last one.
That’s what the world’s most powerful economist did last Tuesday — Federal Reserve Chairman Jerome Powell told a Brookings Institution event that rising U.S. home prices during the pandemic were in line with the “real estate boom.” definition of bubbles.
“Because of the epidemic, mortgage rates were very low at the time, and people wanted to buy houses, and they wanted to leave the city and buy houses in the suburbs, so there was indeed a real estate bubble in the United States, and housing prices rose to very unsustainable levels, and there were overheating, etc. Problem. So, now the real estate market will usher in another phase of the bubble, and hopefully its supply and demand relationship will reach a better state.” Powell said.
Combined with Powell’s previous speeches, the process of “balancing” US real estate should have already begun. In June, Powell said a sharp rise in mortgage rates would help “reset” the U.S. housing market. Powell told reporters in September that the U.S. had officially entered a “difficult housing market correction” that would restore “balance” to the market.
Before Powell admitted there was a “bubble,” the Dallas Fed published an article in November titled “Deflating the U.S. Housing Bubble Is a Delicate and Difficult Task.” The article argues that U.S. policy makers should try to deflate the bubble, not pop it.
“In the current environment, when housing demand shows signs of softening, monetary policy needs to be very careful to thread the needle, cutting inflation without triggering a downturn,” Martinez Garcia of the Dallas Fed said in the article. A downward spiral in house prices—meaning that it doesn’t trigger a big sell-off in the housing market—will exacerbate the downturn.” Garcia also said: “Although the form is challenging, a catastrophic crash is not inevitable. There is still a window of opportunity to achieve the Fed’s soft landing objective.”
To better understand where the housing market is headed next, we can delve into what Powell said about the housing market.
Objectively speaking, the U.S. real estate market did experience a bubble during the epidemic. According to data from the Federal Reserve Bank of Dallas, U.S. housing prices in 2022 are actually more out of touch with fundamentals than in 2005 and 2008.
The tear between house prices and fundamentals should heal somewhat over the next year, which is why Morgan Stanley, Zonda, KPMG, John Burns Real Estate Advisory, Moody’s Analytics, Goldman Sachs, Wells Fargo, Fannie Mae, and Zelman The common opinion of several industry analysis institutions such as United Corporation. The firms believe U.S. home prices will fall further in 2023 as consumer burdens mount (mortgage rates in the U.S. have surged 3 percent after a 40 percent surge in U.S. home prices). If US home prices (now down 2.2% from their peak in June 2022) continue to fall, while incomes continue to rise, fundamentals will indeed start to return to reality.
However, Fed officials do not believe that the current housing market correction is a repeat of 2008.
“From a financial stability standpoint, we haven’t seen in this cycle the kind of massive non-performing credit that we saw before the last financial crisis. Lenders are now managing housing credit much more carefully. So 2022 The situation in China is completely different, and there does not seem to be a financial stability issue at the moment. But we also do understand that real estate is a big aspect that affects our policies.” Powell told reporters in early November.
The last housing bubble was a different story. During the last housing bubble, greedy lenders would issue mortgages (or more specifically, subprime mortgages) to borrowers with bad credit histories. The influx of loans fueled a housing boom and rising house prices. However, as the Federal Reserve tightened its monetary policy, the U.S. experienced a market adjustment in 2006. The real estate market quickly experienced an oversupply situation. A large number of non-performing loans could not be repaid, and many houses had to be foreclosed. This combination of oversupply and a large number of foreclosures contributed to a 26% drop in U.S. home prices between 2007 and 2012.
While Fed officials acknowledged the possibility of a “substantial correction” in U.S. house prices, they don’t think this round of adjustment will be as disruptive as it was in 2008. The reason is that the Fed believes that in the next few years, we don’t have to worry about a large-scale foreclosure crisis or a large-scale oversupply.
Due to the combination of high sales in the real estate market and supply chain problems, a large number of housing projects in the United States were not delivered on time during the epidemic. On the one hand, this may exacerbate downward pressure on housing prices in 2023 as real estate developers rush to hand over their homes. On the other hand, these houses are not enough to solve the housing shortage in the United States. Powell acknowledged as much in his speech last Wednesday.
Powell said: “None of these (the ongoing housing adjustments) will cause long-term problems, because the United States is a developed country, and the number of housing under construction is difficult to meet the needs of the public, so the housing shortage will be seen in the long run. to still exist.”
So while the sharp rise in mortgage rates has the potential to bring “balance” to the housing market by depressing housing prices and give some room for further growth, the trajectory of the market in the long run may remain Bad for the buyer.
Let’s also be clear – no one knows how the so-called “housing market correction” will unfold. There are too many questions to answer. For example, will inflation in the United States fall rapidly, and at the same time, lower mortgage rates? Or is inflation fairly sticky, and thus needs to keep interest rates higher for a longer period of time?
But one thing is certain, that is, based on historical experience, the next step will definitely vary from place to place.
An important reason for saying this is that the fundamentals of different regions vary greatly. Take Cleveland and Austin as examples. The former experienced a real estate boom during the epidemic, and the latter’s housing prices soared by more than 70%. Of course, the real estate markets in the two places have changed now. Austin has seen a sharp correction (Moody’s analysis believes that housing prices in the area are “overvalued” by 61%), while Cleveland’s housing price growth has only slowed down slightly ( Moody’s Analytics believes that housing prices in the area are 15% overvalued).
Simply put, the fundamentals of the real estate market still matter. (Fortune Chinese website)
Translated by: Park Sung Kyu
In 2005, Fed Chair Alan Greenspan told Congress that a “bubble in home prices for the nation as a whole does not appear likely.” Of course, not only had a housing bubble formed, it was nearing its peak just as Greenspan delivered that message on Capitol Hill.
Fast forward to 2022, and the scars of the last bubble have clearly made economists less afraid to acknowledge a housing bubble—even if they believe the bubble could be less dangerous than the one that formed in the early 2000s.
On Tuesday, the most powerful economist in the world did just that: Speaking at a Brookings Institute event, Fed Chair Jerome Powell told the audience that the run-up in home prices during the Pandemic Housing Boom qualifies a “housing bubble.”
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing Prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand,” Powell said.
According to past statements by Powell, that process of bringing “balance” to the US housing market has already begun. In June, Powell said spiked mortgage rates would help to “reset” the US housing market. Then in September, Powell told reporters that We had officially entered into a “difficult [housing] correction” that would restore “balance” to the market.
That “bubble” acknowledgment by Powell comes on the heels of an article published in November by the Federal Reserve Bank of Dallas with the title “Skimming US Housing Froth a Delicate, Daunting Task.” The article argued that policymakers should try to deflate the bubble rather than burst it.
“In the current environment, when housing demand is showing signs of softening, monetary policy needs to carefully thread the needle of bringing inflation down without setting off a downward house-price spiral—a significant housing sell-off—that could aggravate an economic downturn ,” writes Martínez-García at the Dallas Fed. “A severe housing bust from the frothy pandemic run-up isn’t inevitable. Although the situation is challenging, there remains a window of opportunity to deflate the housing bubble while achieving the Fed’s preferred outcome of a soft landing.”
To better understand where we might head next, let’s take a deeper examination of Powell’s housing comments.
The US housing market got objectively bubbly during the pandemic. In fact, data produced by the Dallas Fed (see chart above) finds that home prices in 2022 are actually more detached from underlying fundamentals than they were 2005 and 2008.
Over the coming year, those detached fundamentals should begin to heal a bit. That’s a view held by firms like Morgan Stanley, Zonda, KPMG, John Burns Real Estate Consulting, Moody’s Analytics, Goldman Sachs, Wells Fargo, Fannie Mae, and Zelman & Associates. Those firms believe that “pressurized” affordability (ie mortgage rates spiking 3 percentage points just after US home prices soared 40%) will see home prices fall further in 2023. If US home prices—which are already down 2.2% from their June 2022 peak—continue to fall and incomes continue to rise, fundamentals would indeed begin to come back down to earth.
That said, Fed officials don’t think the ongoing housing correction is a 2008 repeat.
“From a financial stability standpoint, we didn’t see in this cycle the kinds of poor underwriting credit that we saw before the Great Financial Crisis. Housing credit was much more carefully managed by the lenders. It’s a very different situation [in 2022] , it doesn’t present potential, [well] it doesn’t appear to present financial stability issues. But we do understand that [housing] is where a very big effect of our policies is,” Powell told reporters earlier in November.
See, the last housing bubble was fundamentally a different story. Back in the aughts, zealous lenders were giving out mortgages (or better put, subprime mortgages) to folks who historically wouldn’t have qualified. As that credit rushed in, it helped to drive both a building boom and a home price boom. However, once Fed tightening set off a housing market correction in 2006, that building boom turned into a supply glut and those bad loans turned into a foreclosure crisis. That combination of oversupply and “forced selling” saw US home prices fall a staggering 26% between 2007 and 2012.
While Fed officials acknowledge that we could see a “material correction” in home prices, they don’t believe it’d be as damaging as the 2008 crash. The reason? In the years ahead, the Fed believes we shouldn’t have to worry about a foreclosure crisis nor a massive supply glut.
A combination of high sales and supply chain issues saw home builders build-up quite a backlog of unfinished projects during the pandemic. On one hand, as homebuilders rush to offload these homes that could put downward pressure on home prices in 2023. On the other hand, this simply isn’t enough homes to solve the nation’s housing shortage. Powell acknowledged as much on Wednesday.
“None of this [the ongoing housing correction] affects the longer run issue, which is that we got a built-up country and it’s hard to get zoning and hard to get housing built in sufficient quantities to meet the public’s demand,” Powell. “There’s a longer run housing shortage.”
So while spiked mortgage rates may help to bring “balance” to the housing market by pushing home prices lower and giving inventory (see chart above) breathing room to grow, the trajectory of the market might not favor buyers for long.
Let’s be clear: No one really knows how the ongoing housing correction will actually unfold. There are simply too many question marks. Does inflation come down quickly and bring mortgage rates down with it? Or does inflation prove sticky, and thus require higher rates for longer?
But we can say, based on past history, whatever comes next will surely vary by housing market.
One big reason that it’ll vary is that fundamentals vary so much by market. Look no further than Cleveland and Austin. The former saw a modest housing boom during the pandemic, while the latter saw home prices soar over 70%. Now that the housing market has shifted, Austin (which Moody’s Analytics estimates is “overvalued” by 61%) has already slipped into a sharp correction while Cleveland (which is “overvalued” by 15%) has simply slowed down.
Simply put: Housing fundamentals still matter.
This article is reproduced from: https://www.fortunechina.com/shangye/c/2022-12/06/content_424070.htm
This site is only for collection, and the copyright belongs to the original author.