Report by Dallas Fed warns of potential housing bubble

The report cited historically low interest rates, pandemic-related fiscal stimulus programs as well as supplychain disruptions and associated policy responses as drivers behind the recent national price growth.

As home price growth continues to accelerate in North Texas and nationwide, economists say there are signs of another housing bubble emerging — but a very different one than what was seen leading up to 2008’s global housing crisis.

Dallas-Fort Worth home prices were up 27% from January 2021 to 2022 in the justreleased S&P CoreLogic CaseShiller Home Price Index. That marks the fastest growth ever recorded for the region on the index. Nationally, home prices increased 19%, the strongest January year-over-year increase recorded.

Economists are seeing indications that housing prices have been becoming increasingly out of step with market fundamentals, according to a new report from the Federal Reserve Bank of Dallas based on 2021 housing data.

The report cited historically low interest rates, pandemic-related fiscal stimulus programs as well as supply-chain disruptions and associated policy responses as drivers behind the recent national price growth.

But the researchers wrote that rising home prices may have fueled a wave of more aggressive speculation among investors. Home prices can diverge from market fundamentals “when there is widespread belief that today’s robust price increases will continue,” according to the report.

“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,” the researchers wrote. “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.”

Still, the economists wrote that they don’t expect the fallout of a housing correction in today’s market to be comparable to the 2008 housing crisis in magnitude.

“Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom,” they wrote, adding that banks, policymakers and regulators are better equipped to react to a housing correction using experience from the previous bubble and tools developed since.

Phoenix; Tampa, Fla.; and Miami reported the highest year-over-year price gains of the 20 cities tracked by the Case-Shiller index.

The index compares sales price changes of specific properties over time. Case-Shiller’s price estimate is considered more accurate than home sales data from real estate agents, which can be influenced by the type of properties that are selling each month.

“While the re-acceleration of home price gains may be concerning and likely discouraging for first-time and younger buyers, it is nevertheless unsurprising considering the dire inventory of for-sale homes, which continues to decline and continually record new lows,” Selma Hepp, deputy chief economist for CoreLogic, said in a statement.

Dan Handy, an economic data analyst for Zillow, said there’s no sign yet that there will be a big enough wave of sellers listing their homes this spring to ease the ultracompetitive market across the nation.

“Though home sales have remained at elevated levels, rising mortgage rates, rapidly increasing home values, and fierce competition for listings may have some potential buyers rethinking whether they’re going to take the plunge into the market,” Handy said in a statement. “Looking to the months ahead, competition between buyers will be intense.”