Real-Time Market Monitoring Finds Signs of Brewing U.S. ...

Monitoring Emergence of Housing Bubbles in Real Time. An asset—in this case, housing—is in the primary expansionary phase of a bubble when price ... Skiptocontent Togglenavigation Publications News&Events Careers Research Research» DallasFedEconomics» EconomicanalysisandinsightsfromtheFederalReserveBankofDallas GlobalPerspectives» Connectingglobalthoughtleadersandcommunitymembersforconversationaroundeconomicissues. 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VisitUs VisittheDallasFed DirectionstotheDallasFed AboutOurDistrict CountiesintheEleventhDistrict StateMemberBanks Bankholidays TheEconomyinAction TheEconomyinActionisafreeexhibitattheFederalReserveBankofDallas.Throughinteractiveexhibitsandmultimediadisplays,learnabouttheFederalReserve,moneyandtheeconomy. takeatour Publications News&Events Careers ResearchDallasFedEconomics Togglenavigation Research ResearchHome TexasEconomy TexasEconomyHome DallasFedSurveys Agricultural BankingConditions DallasFedEnergy TexasManufacturing TexasServiceSector EconomicAnalysis BeigeBook EconomicIndicators MexicoEconomicUpdate TexasEmploymentForecast ALLeconomicanalysis EconomicData SouthwestEconomy ResearchbyTopic U.S.Economy U.S.EconomyHome MarketValueofGov'tDebt TrimmedMeanPCE PCEInflationUpdate U.S.EconomyCharts WeelyEconomicIndex InternationalEconomy AboutGlobalizationInstitute Data DGEI GlobalEconomicConditions InternationalHousepriceDatabase Real-TimeHistoricalDataset-OECD InstituteEvents GlobalPerspectives InstituteEvents MexicoEconomicUpdate Publications AnnualReport Globalizationarticles WorkingPapers Who'sWho InstituteStaff SeniorFellows ResearchAssociates EnergyResearch EnergyHome Articles&Research DallasFedEnergySurvey EnergyintheEleventhDistrict EnergyIndicators EnergySlideshow DallasFedEconomics Data High-frequencydata Regionaldata USdata Internationaldata Energydata DataBasics OurPeople ResearchEconomists BusinessEconomists ResearchAnalysts VisitingScholars Events Conferences GlobalPerspectives Seminars Publications SouthwestEconomy SpecialReports WorkingPapers MOREPublications ResearchDataCenter National Real-TimeMarketMonitoringFindsSignsofBrewingU.S.HousingBubble JarodCoulter,ValerieGrossman,EnriqueMartínez-García,PeterC.B.PhillipsandShupingShi March29,2022 Realhouseprices—pricesadjustedforinflation—havesteadilyincreasedintheU.S.since2012.Furtheraccelerationinthepaceofhouse-priceappreciationbeganbeforethepandemicbuthasstrengthenednoticeablysinceearly2020. Forprospectivebuyersandsellersaswellaspolicymakers,knowingthestateofhousingmarketsisimperative.UsinganovelstatisticaltoolkitforassessingthehealthoftheU.S.housingmarketinrealtime,wearguethattheunderlyingcausesoftherun-updifferfromthoseduringthelasthousingboom,whichprecededthe2007–09GlobalFinancialCrisis.However,thereisgrowingconcernthatU.S.housepricesareagainbecomingunhingedfromfundamentals. MonitoringEmergenceofHousingBubblesinRealTime Anasset—inthiscase,housing—isintheprimaryexpansionaryphaseofabubblewhenpricerisesareoutofstepwithmarketfundamentals.Rapidrealhouse-priceappreciation,suchasthatobservednow,doesnotinitselfsignalabubble.Shiftsindisposableincome,thecostofcreditandaccesstoit,supplydisruptions,andrisinglaborandrawconstructionmaterialscostsareamongtheeconomicreasonsforsustainedrealhouse-pricegains. Butrealhousepricescandivergefrommarketfundamentalswhenthereiswidespreadbeliefthattoday’srobustpriceincreaseswillcontinue.Ifmanybuyerssharethisbelief,purchasesarisingfroma“fearofmissingout”candriveuppricesandheightenexpectationsofstronghouse-pricegains. Thisself-fulfillingmechanismleadstopricegrowththatmaybecomeexponential(orexplosive),resultinginthehousingmarketbecomingprogressivelymisalignedfromfundamentalsuntilinvestorsbecomecautious,policymakersintervene,theflowofmoneyintohousingdriesupandahousingcorrectionorevenabustoccurs. Expectations-drivenexplosiveappreciation(oftencalledexuberance)inrealhousepriceshasmanyconsequences,includingthemisallocationofeconomicresources,distortedinvestmentpatterns,individualbankruptciesandbroadmacroeconomiceffectsongrowthandemployment.Monitoringthehousingmarketinrealtimefortheemergenceofsuchboomsinpricescanhelpinvestorsandpolicymakersrespondbeforemisalignmentsbecomesoseverethatsubsequentcorrectionsproduceeconomicupheaval. Timeseriesofrealhousepricesthatcontainepisodesofexpectations-drivenbubblesdisplaytwoimportantproperties—theyarenonlinearwhengraphedbecausetheyareexplosiveduringtheirboom(orexuberant)phase,andtheyresultinacorrectionorevenacollapseifthemarketcrashes. Toprovidemarketdiagnostics,theDallasFed’sInternationalHousePriceDatabaseteam,inpartnershipwithanetworkofscholarsfromaroundtheworldcollaboratingundertheInternationalHousingObservatory,producesdatasetsandstatisticsthatcharacterizepotentialmarketexuberance.Themethodologyusesnovelstatisticalmethodstocontinuouslymonitorhousingmarkets—intheU.S.andaroundtheworld—todetectsymptomsandsignalthepresenceofemerginghousingbooms. SignsofaMarketTippingPoint Whenthestatisticsderivedfromthesetechniquesaresignificant,theperiodsaredate-stampedtosignifyexuberance—pricesgrowingatanexponentialrateexceedingwhateconomicfundamentalswouldjustify.Theindicatorsarecomputedquarterly.Atestoutcomeabovea95percentthresholdsignifies95percentconfidenceofabnormalexplosivebehavior,orhousingmarketfever. ThehistoryoftheU.S.exuberanceindicatorisshownagainstthe95percentthresholdinChart1.Thestatisticplottedinthebottompaneldeliversamarkettemperaturereading,likethatfromapersonalthermometer.Theexuberanceindicatorshowsthetemperature,andtheconfidenceupperboundistheabnormalitythreshold.ThecurrentreadingindicatesthattheU.S.housingmarkethasbeenshowingsignsofexuberanceformorethanfiveconsecutivequartersthroughthirdquarter2021. Downloadablechart|Chartdata TheU.S.isnotaloneinexperiencinghousingmarketfever.Fourteenofthe25countriesintheDallasFed’sInternationalHousePriceDatabaseshowsignsofrealhouse-priceexuberance. ADiagnosticApproachtoU.S.HousingMarkets ToassessU.S.housepricesduringthepandemic,wefirstdevelopanempiricalrelationshipbetweenhousepricesandthoseeconomicfundamentalsunderpinningthemarket,basedondatathroughfourthquarter2019.Thetheoreticalbenchmarkisthefundamentalvalueofhousingbasedonthesumofdiscountedfuturerents.Thisissimilartothefinancetenetthatthefundamentalvalueofacompany’sstockistheflowoffuturedividendsdiscountedbythecostofcapital.(Analogously,thecompanyhereisahouse,anditsdividendsarerentsthatarediscountedbyinterestrates.) Workingfromthatbenchmark,thehouse-price-to-rentratioisexplainedbyasmallsetoflaggedeconomicvariables,suchaspersonaldisposableincomepercapita,housingrentsandlong-terminterestrates.Theresidualoftheregression,afterremovingtheeffectsoffundamentals,isassessedforanyremainingevidenceofexplosivebehavior.Theupshot:Sincethebeginningof2020,theprice-to-rentratiohassoaredbeyondwhatobservedfundamentalsalonecanexplain(Chart2). Downloadablechart|Chartdata Thegapbetweentheactualprice-to-rentratioanditsfundamental-basedlevelintheU.S.hasgrownrapidlyduringthepandemic—comparabletotherun-upofthelasthousingboom—andstartedshowingsignsofexuberancein2021.Theexuberancestatisticconfirmsthatrecentincreasesarefarfromordinary. Anotherimportantlong-runanchor—tieddirectlytohousingaffordability—istheratioofhousepricestodisposableincome.Chart3showsdatesofepisodesofexuberanceforthismeasureofhousingaffordability.Thesedata—unlikeourpreviousmetrics—donotyetdisplayevidenceofexplosivenessinthethirdquarterof2021.Buttherapidincreaseinthestatisticclosetothethresholdduring2021indicatesthatU.S.realhousepricesmaysoonbecomeuntetheredfrompersonaldisposableincomepercapita. Downloadablechart|Chartdata Thedelayinelevationofthisexuberancestatisticispartlytheconsequenceofasurgeinrealdisposableincomeduringthepandemicthatledtoslowergrowthratesintheprice-to-incomeratio.Thesurgeindisposableincomeismostlyassociatedwithpandemic-relatedfiscalandmonetarystimuluseffortsandreducedhouseholdconsumptionarisingfrommobilityrestrictionsandlockdowns. Ifdisposableincomeincreasesturnouttobetransitory—asfiscalstimuluswanesandtheFederalReservereversesitsaccommodativemonetarypolicy—recentpatternsintheprice-to-incomeratiomayprovealess-usefulmeasureofhousingaffordability.Suchtransitoryincreasesindisposableincomearenotstrongdeterminantsoflong-termhousinginvestment.Thus,theprice-to-incomeratiomeasurealonemayproduceoverlyconservativeresultswhenidentifyinghousingmarketbubbles. AnotherU.S.HousingBubbleBrewing? OurevidencepointstoabnormalU.S.housingmarketbehaviorforthefirsttimesincetheboomoftheearly2000s.Reasonsforconcernareclearincertaineconomicindicators—theprice-to-rentratio,inparticular,andtheprice-to-incomeratio—whichshowsignsthat2021housepricesappearincreasinglyoutofstepwithfundamentals. Whilehistoricallylowinterestratesareafactor,theydonotfullyexplainhousingmarketdevelopments.Otherdrivershaveplayedarole,includingpandemic-relatedU.S.fiscalstimulusprogramsandCOVID-19-relatedsupply-chaindisruptionsandassociatedpolicyresponses.Theresultingfundamental-drivenhigherhousepricesmayhavefueledafear-of-missing-outwaveofexuberanceinvolvingnewinvestorsandmoreaggressivespeculationamongexistinginvestors. Basedonpresentevidence,thereisnoexpectationthatfalloutfromahousingcorrectionwouldbecomparabletothe2007–09GlobalFinancialCrisisintermsofmagnitudeormacroeconomicgravity.Amongotherthings,householdbalancesheetsappearinbettershape,andexcessiveborrowingdoesn’tappeartobefuelingthehousingmarketboom. Importantly,experiencefromthehousingbubbleintheearly2000sandthesubsequentdevelopmentofadvancedtoolsforearlydetectionanddeploymentofwarningindicators—someillustratedinthisanalysis—meanthatmarketparticipants,banks,policymakersandregulatorsareallbetterequippedtoassessinrealtimethesignificanceofahousingboom.Thus,theyareinamore-informedpositiontoreactquicklyandavoidthemostsevere,negativeconsequencesofahousingcorrection. AbouttheAuthors JarodCoulter CoulterisaresearchanalystintheResearchDepartmentattheFederalReserveBankofDallas. ValerieGrossman GrossmanisaresearcherandthewebcontentmanagerintheResearchDepartmentattheFederalReserveBankofDallas. EnriqueMartínez-García Martínez-GarcíaisaseniorresearcheconomistandadvisorintheResearchDepartmentattheFederalReserveBankofDallas. PeterC.B.Phillips PhillipsisSterlingProfessorEmeritusatYaleUniversityandadistinguishedprofessorattheUniversityofAuckland. ShupingShi ShiisaprofessorofeconomicsatMacquarieUniversityinSydney,Australia. TheviewsexpressedarethoseoftheauthorsandshouldnotbeattributedtotheFederalReserveBankofDallasortheFederalReserveSystem. RealEstateMonetaryPolicyEconomicConditionsCOVID EconomicanalysisandinsightsfromtheFederalReserveBankofDallas Home Archive ByTopic SubscribetoDallasFedEconomicsemailalerts OurPeople ResearchEconomists BusinessEconomists ResearchAssistants VisitingScholars Subscribetoemailalertsforeconomicresearchandupdates RelatedArticles FederalReserveBanksofAtlantaandDallasConferenceExploredHousing,UrbanEconomics ReadMore TakingtheGlobalHousingMarket’sTemperature:IsItRunningaFever(Again)? ReadMore Fed’sMortgage-BackedSecuritiesPurchasesSoughtCalm,AccommodationDuringPandemic ReadMore SurgingHousePricesExpectedtoPropelRentIncreases,PushUpInflation ReadMore FederalReserveBankofDallas2200N.PearlSt.,Dallas,Texas75201|214.922.6000or800.333.4460 FollowtheFed ContactUs TermsofUse PrivacyNotice