The United States is going through a pandemic “housing bubble”, says the chairman of the Fed. Will it burst or “deflate?” »

He said the US housing market needed a ‘tough correction’ and a ‘reset’ to bring better ‘balance’ to a market that had seen skyrocketing price and demand growth during the pandemic frenzy. – but this week Federal Reserve Chairman Jerome Powell used a stronger word to describe the state of the nation’s housing market.

“Bubble.”

While answering questions from the audience at a Brookings Institution event on Tuesday, Powell told the crowd that the dramatic rise in house prices in 2020, 2021 and part of 2022 was a “housing bubble.”

“Coming out of the pandemic, the rates were very low. People wanted to buy houses. They wanted to get out of, you know, cities and buy houses in the suburbs because of COVID. And so you really had a housing bubble,” he said. “You’ve had house prices that have gone up to very unsustainable levels and overheating and that sort of thing.”

At the same time, the country is also grappling with a long-term housing shortage that has helped fuel demand.

“So now the housing market is going to go through the other side and hopefully come out in a better place between supply and demand,” Powell said. “But none of that really affects the longer-term problem, which is we, you know, is we have a built-up country and it’s hard to get zoning . It is difficult to build enough housing to meet public demand.

Throughout the unprecedented spike in home sales and home prices — which has particularly affected housing markets in the Mountain West states, including Idaho and Utah — housing experts have warned caution against drawing too many parallels with the housing bubble of 2005, fueled in large part by risky lending practices. request. When the subprime mortgage crisis caught up with the big banks, this bubble burst and propelled the global economy into the Great Recession.

Today, economists continue to say they see no dramatic implications for the national economy as the U.S. housing market evolves under relentless pressure from the Federal Reserve’s fight against inflation, its aggressive hikes interest rates, which indirectly caused mortgage rates to hover around 6% to 7%.

However, economists have warned that U.S. house prices are becoming increasingly detached from market fundamentals. Earlier this year, before prices peaked in May, researchers at the Federal Reserve Bank of Dallas wrote a blog post saying they saw signs of a brewing bubble – but not the same type of real estate bubble that preceded the financial crisis of 2007 and 2008.

“There are growing concerns that U.S. home prices may once again be out of balance with fundamentals,” the researchers wrote, though they argued that “the underlying causes of the rise sharply differ from those of the last housing boom”. A rapid rise in prices alone “does not in itself signal a bubble”, but house prices can “deviate from market fundamentals when there is a widespread belief that today’s sharp price increases will continue”. In other words, the “exuberance” or “fear of missing out” on the pandemic real estate frenzy has fueled concerns about a bubble forming.

Now, after months of higher interest rates, the market has reached a tipping point. Powell’s comments this week also came after another article published Nov. 15 by the Federal Reserve Bank of Dallas that urged policymakers to “deflate the bubble rather than burst it,” as Fortune put it.

The title of the article? “Skimming Housing Moss in the United States, a Delicate and Difficult Task.” Its author, Enrique Martínez-García, Senior Research Economist, also used the term “housing bubble” and wrote that “the pandemic outbreak prior to the summer of 2022 exhibited symptoms of a widening FOMO-driven bubble ( fear of missing out), a bubble that extends beyond the United States”

As housing demand weakens, Martínez-García wrote that monetary policy makers must “carefully thread the needle to bring inflation down without triggering a downward spiral in house prices – a massive home sales – which could worsen an economic slowdown Rising mortgage rates, stemming from the Fed’s hike in policy rates, reduce the risk of a prolonged run-up in house prices.

“A gradual unwinding of pandemic housing excesses can occur if policymakers can stifle inflation without stressing buyers too much and can slow increases in house prices and rents while preventing underwater mortgages (housing a value less than what is due) to increase”, Martínez-García continued.

U.S. households and banks are in “better shape” than the boom and bust of the 2000s, he wrote, which could likely offer more of a “cushion to withstand” some of the aftermath. “Cooling” buyer expectations is essential to “steer house prices onto a more sustainable path and avoid the risk of a disorderly market correction”.

So, is a real estate crash coming?

“A severe housing crisis due to the spiraling pandemic is not inevitable,” Martínez-García wrote. “While the situation is difficult, there remains a window of opportunity to deflate the housing bubble while achieving the Fed’s preferred outcome of a soft landing. This is more likely to happen if the worst-case scenario of an economic slowdown induced by a price correction can be avoided.