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.Įxpectations-driven explosive appreciation (often called exuberance) in real house prices has many consequences, including the misallocation of economic resources, distorted investment patterns, individual bankruptcies and broad macroeconomic effects on growth and employment. 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. Shifts in disposable income, the 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.īut real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. Rapid real house-price appreciation, such as that observed now, does not in itself signal a bubble. Monitoring emergence of housing bubbles in real timeĪn asset-in this case, housing-is in the primary expansionary phase of a bubble when price rises are out of step with market fundamentals. house prices are again becoming unhinged from fundamentals. However, there is growing concern that U.S. housing market in real time, we argue that the underlying causes of the run-up differ from those during the last housing boom, which preceded the 2007–09 Global Financial Crisis. Using a novel statistical toolkit for assessing the health of the U.S. Further acceleration in the pace of house-price appreciation began before the pandemic but has strengthened noticeably since early 2020.įor prospective buyers and sellers as well as policymakers, knowing the state of housing markets is imperative. Real house prices-prices adjusted for inflation-have steadily increased in the U.S.
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