Dallas Fed Warns of Potential Housing Bubble — How FOMO Is Making Conditions Worse

·2 min read
AlenaMozhjer / Getty Images/iStockphoto
AlenaMozhjer / Getty Images/iStockphoto

The Federal Reserve Bank of Dallas uncovered signs of a housing bubble on the horizon, based on real-time market monitoring. DallasFed.org revealed in a blog post that house prices “appear increasingly out of step with fundamentals.” They don’t see it improving in the near future, either, especially if consumers continue buying houses as they try to beat the rising market.

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When the Fed researchers plotted real U.S. house prices from 1982 through today, they discovered prices rising exponentially beyond what they should be based on economic conditions — or what the experts call exuberance — since the third quarter of 2021.

Housing prices have risen due to many logical reasons, including rising costs of material, supply chain disruptions, increased disposable income during the pandemic, low interest rates and easy access to credit. But the rise, according to the Dallas Fed, has shifted beyond these fundamentals into exuberance.

The higher housing prices “may have fueled a fear-of-missing-out wave of exuberance involving new investors and more aggressive speculation among existing investors,” the blog reported. Buyers who are afraid of missing out on low interest rates are scrambling to buy homes and investment properties before home prices increase further. The “fear of missing out” (FOMO) is, in turn, driving the market to even greater heights.

The high price-to-rent ratio and the price-to-income ratio, which was tempered by increased income for some during the pandemic, also point to an impending housing bubble. However, the Fed said fallout from a housing correction would not be as bad as the global financial crisis that occurred between 2007 and 2009.

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Having learned from experience in 2008, the Fed, policymakers, lenders, and regulators are better equipped to react quickly and avoid the “most severe, negative consequences of a housing correction,” the report said.

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