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Fears of a sooner-than-expected housing market crash continue to grow on Wall Street, as investors closely watch the dangerous rise in inflation. Despite having assured the latest inflation spike will be proven temporary, the Federal Reserve is being increasingly pressured to initiate tampering plans as the cost of home and rents spiral out of control. With home prices nearly 24 percent higher than a year ago, and rents surging at almost triple their normal rate in just the first six months of 2021, concerns that housing costs could push inflation even higher are mounting. Given that shelter makes up about one-third of a key inflation measure, that could undermine the Fed’s statements that recent price increases, which have shown up in everything from food to appliances to cars, will slow.
The price of a home has skyrocketed over the last year, with some local markets registering a 37 percent increase year-over-year. That has triggered an enormous pent-up demand, as millennials started to reach home-buying age. On the other hand, the Fed’s easy-money policies have suppressed mortgage rates to rock-bottom lows at the same time a massive population of young adults left urban centers seeking safer, spacier homes in the suburbs. However, with such inflated prices, would-be homebuyers are becoming unable to afford a new house, which in turn is leading to an even more dramatic increase in rents. In essence, the younger generations are being left behind as they cannot compete with boomers, who past years adding to their savings, and wealthy investors, who have been buying entire neighborhoods to turn into rental units.
Meanwhile, the number of people between the ages of 18 and 34 living with their parents has doubled, so demand is also high for rental units. “This disconnect between supply and demand has been underway for a long time,” said Doug Duncan, chief economist at Fannie Mae. “We’re finally seeing it flow into some of the inflation numbers.” Many housing experts have been warning of threatening parallels between the Great Recession and today’s housing market. Recently, the developer of the Case-Shiller index, Robert Shiller, said that another housing market crash seems to be emerging on the horizon. He stated that the market has several “aspects of a bubble”. However, as opposed to the stock market, the housing market is less volatile, meaning that it doesn’t collapse overnight. Instead, it starts by gradually losing steam, and then, the bubble finally bursts. “You can see that we’re seeing price increases now that haven’t quite been realized since those years just before the financial crisis,” Shiller said.
Even though the fundamentals are different this time around, the same factors are at play. In 2007, a housing bubble fueled by shaky mortgages burst, sparking a financial crisis that cratered the global economy. The circumstances pushing prices up are different now, but there is still ample debate over whether the soaring prices could lead to another crash or whether the Fed will take aggressive steps to prevent one. In 2008, the foreclosure crisis that followed the housing crash was so severe that tens of millions of strained homeowners had no alternative but foreclosure. Today, the central bank has to make a tough choice: rising interest rates to fight inflation, which would result in a housing crash, or letting inflation run, which will effectively make the population poorer and the economy weaker.
In face of all of these imbalances, even Federal Reserve officials revealed to be concerned that the housing boom might be headed to a burst. Robert Kaplan, the president of the Federal Reserve Bank of Dallas, said he was becoming “nervous” about the conditions of the housing market. With home prices rising at a double-digit pace, some Fed officials feel that the central bank’s big purchases of mortgage bonds “could be helping to inflate” the market by keeping mortgages cheap, “inspiring people to borrow more and buy bigger”, a situation not that different from what was seen just before the 2008 housing crash. All evidence is signaling that the market is going down that same path. There’s only so much the Fed can do to keep delaying the coming crash, but no matter what choice it ultimately makes, whether we gradually fall into another economic recession or we face a brutal financial collapse, a disaster is ahead.