Fed Chair Powell: U.S. ‘housing bubble’ formed during the pandemic and now ‘the housing market will go through the other side of that’

In 2005, Fed Chairman Alan Greenspan told Congress that “a bubble in the nation’s home prices does not seem likely.” Of course, the housing bubble wasn’t over, it was nearing its peak just as Greenspan was delivering the message on Capitol Hill.

Fast forward to 2022, and the last scars of the bubble have made it clear that economists are not afraid to admit to a housing bubble – even if they believe that the bubble may be more dangerous than the one that formed in the early 2000s.

On Tuesday, the world’s most powerful economist did just that: Speaking at an event at the Brookings Institute, Fed Chairman Jerome Powell told the audience that rising home prices during the Pandemic Housing Boom are appropriate “the housing bubble.”

“Out of the epidemic, [mortgage] Prices were very low, people wanted to buy houses, they wanted to go out of the cities and buy houses in the towns because of the COVID. So you really had a housing bubble, you had housing prices going up [at] very unstable levels and temperature and that kind of thing. So, now the housing market is going to go through the other side and hopefully come out of a better place between supply and demand,” Powell said.

According to Powell’s previous statements, that process of bringing “balance” to the US housing market has already begun. In June, Powell said higher mortgage rates would help “reset” the US housing market. Then in September, Powell told reporters that we had officially entered “a crisis [housing] “correction” that will restore “balance” to the market.

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That “bubble” Powell acknowledges comes after an article published in November by the Federal Reserve Bank of Dallas titled “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 must carefully push the needle to slow inflation without slowing the decline in housing prices—a significant sell-off—that could trigger a recession. ,” writes Martínez-García at the Dallas Fed. “Severe housing busts due to the bubble epidemic are inevitable. Although the situation is challenging, there remains an opportunity to deflate the housing bubble while achieving the Fed’s preferred soft spot outcomes. “

To better understand where we can head next, let’s take a closer look at Powell’s housing ideas.

The U.S. housing market has performed well during the pandemic. In fact, data produced by the Dallas Fed (see chart above) finds that home prices in 2022 are more constrained by fundamentals than they were in 2005 and 2008.

Next year, those closed bases should start to heal a little. This is a view held by firms such as 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 an affordability “squeeze” (that is, mortgage prices rising 3 percent after US home prices rose 40%) will see home prices fall further by 2023. – continue to decline and wages continue to rise, fundamentals will begin to return to earth.

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That said, Fed officials don’t think the ongoing housing correction is a repeat of 2008.

“From a financial stability perspective, we haven’t seen in this cycle the kinds of low-underwriting debt that we saw before the Great Financial Crisis. Housing debt was being managed more carefully by lenders. It’s a very different situation. [in 2022]it doesn’t show chances, [well] Financial stability issues are not evident. But we understand that [housing] that’s where the biggest impact of our policies is,” Powell told reporters earlier in November.

See, the last housing bubble was basically a different story. Back in the aughts, overzealous lenders were issuing mortgages (or better put, subprime mortgages) to people who historically didn’t qualify. As that debt accelerated, it helped drive both the building boom and home prices. However, after the Fed tightened the housing market in 2006, that construction turned into a supply glut and those bad loans turned into a foreclosure problem. That combination of overselling and “forced selling” saw US home prices drop a staggering 26% between 2007 and 2012.

While Fed officials admit that we may see a “correction” in home prices, they do not believe it will be as dangerous as the 2008 crash. The reason? In the coming years, the Fed believes that we should not have to worry about the problem of foreclosures or oversupply.

A combination of high sales and supply issues has seen homebuilders building a backlog of unfinished projects during the pandemic. On the other hand, as house builders rush to sell these houses that could put downward pressure on house prices in 2023. On the other hand, this is not enough homes to solve the nation’s housing shortage. Powell admitted as much Wednesday.

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“None of these [the ongoing housing correction] it affects a long-term issue, which is that we have a built-up country and it’s hard to get zoning and it’s hard to get housing built in sufficient quantities to meet the needs of the community,” Powell. “There is a chronic housing shortage.”

So while spiked mortgage rates may help bring “balance” to the housing market by boosting home prices and giving inventory (see chart above) breathing room to grow, the market’s trajectory may not favor buyers in the long run.

Let’s be clear: No one really knows how the ongoing housing reform will play out. There are too many question marks. Is inflation falling fast and bringing mortgage rates down with it? Or is inflation proving sticky, and therefore requiring higher rates for longer?

But we can say, based on past history, whatever comes next will be different for the housing market.

The main reason it will vary is that the basics vary greatly from market to market. Look no further than Cleveland and Austin. The former saw a modest housing boom during the pandemic, while house prices rose by more than 70%. Of course, now that the housing market has changed, Austin (which Moody’s Analytics estimates is “overvalued” by 61%) has already retreated to a sharp correction while Cleveland (“overvalued” by 15%) has simply reduced.

In short: Housing fundamentals still matter.

Want to stay updated on housing trends? Follow me on Twitter here @NewsLambert.


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