Dallas Fed: Housing to see ‘severe price correction’

Soon after, luck spoke with Dallas Fed economist Enrique Martínez-García. While the Pandemic Housing Boom is not the same story as the lead-up to the housing crash of the 2000s, he said, housing prices have recovered quickly. isolated from the underlying fundamentals.

“It might be a housing bubble. The evidence suggests it looks like a housing bubble. A little like a duck. It walks like a duck, it looks like a duck, it might be a duck,” said Martínez-García. luck in May. “[It’s time to] raise awareness of potential risks [that] poses at home.”

Fast-forward to February 2023, and Economists at the Dallas Fed are again warning about the the downside risks in the US and European housing market, which is fell into a slump after the start of central banks’ rate hiking cycles in 2022.

“While house price growth has recently started to moderate – or, in some countries, decline – the risk of a deep global housing downturn continues,” Dallas Fed economists wrote on Tuesday. “Affordability crises often stem from unsustainable and widespread excess behavior, the data suggests. In particular, housing has become more vulnerable to overstretched boundaries, resulting in more misappropriation. -allocation of resources and loss of efficiency.”

According to an analysis by Dallas Fed economists, the price-to-income ratio of US housing in 2022 will surpass the peak level hit at the height of the 2000s housing bubble. Unlike 2008, this time we don’t have a subprime crisis or an oversupply of housing. However, Dallas Fed economists say US home prices could still fall.

“Achieving a soft landing on the economy—controlling inflation and avoiding a recession, as the Fed did in 1994—is not negligible given that further tightening of monetary policy may will increase the burden of servicing the home loan and improve the chances of a severe house price correction.” wrote economists at the Dallas Fed.

To “bring the US into line [housing] fundamentals,” Dallas Fed economists say US home prices should fall 19.5%.

“While a moderate housing correction remains the baseline scenario, the risk that a tighter monetary policy could trigger a more severe price correction in Germany and the US cannot be ignored,” Economists at the Dallas Fed wrote their latest article.

According to their research, countries in most of the developed world have seen house prices diverge from fundamentals over time. the Pandemic Housing Boom. But, in their view, the “bubbly” housing markets in the US and Germany may pose the greatest economic risk to the rest of the world.

“The US and Germany, due to the size of their economies, pose a significant risk to global housing… The possibility of a domino effect, where investors will withdraw from international housing seeking safety and liquidity elsewhere, also raising concerns of spillovers ahead. Germany or the US to the global economy,” wrote economists at the Dallas Fed.

Until December, the price of the house in the US as measured by the seasonally adjusted Case-Shiller National Home Price Index THERE fell 2.7% from the June 2022 peak. While that was the second largest price correction in the data series that began in 1987, it paled in comparison to the 26% peak-to-trough crash in home prices seen between 2007 and 2012.

Simply put: Currently, spiking mortgage rates produced only a moderate correction in house prices, with some markets hardly see any impact.

But let’s say we fall into what the Dallas Fed calls a “more severe price correction” scenario. If that happens, it still won’t match what we saw after the 2008 housing boom and after the foreclosure crisis.

“Despite the risk of a material correction on home prices, several factors help reduce my concern that such a correction would trigger a wave of mortgage defaults and potentially destroy the financial system,” Fed Governor Christopher Waller told an audience at the University of Kentucky in October. “One is that because of relatively tight mortgage underwriting in the 2010s, the credit scores of mortgage borrowers today are generally higher than before the last housing correction.”

Want to stay updated on the US housing market? Follow me Twitter on @NewsLambert.

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