Just today, the president of the Federal Reserve Bank of St. The Fed is getting seriously antsy about this massive house price inflation, on top to the regular consumer price inflation that has hit 30-year highs. But the national index of this raging mania doesn’t do justice to individual metropolitan areas, where price spikes reached up to 32%. House prices spiked 19.7% from a year ago, the biggest year-over-year increase in the data going back to 1987, according to the National Case-Shiller Home Price Index today. Housing Bubble 1 is starting to look cute in comparison. Most home buyers are oblivious to the bubble of which the Case-Shiller Index warns, while others are taking a cue from Roy McAvoy in the movie Tin Cup, who said “Well, what the hell? You ride her until she bucks you or don’t ride at all.Even the Fed is getting antsy about this raging mania house-price inflation. And even after the Lehman Brothers firm filed for bankruptcy in September 2008, housing and stock markets didn’t hit bottom until more than a year later. The first glimmer of trouble ahead of the Great Recession appeared at least two years earlier. The timing of the market bubble remains the open question. History shows, however, that when they return, prices often fall well below the mean, forcing even the strongest credit risks into bankruptcy. Missing from the conversation is an economic rule called the Reversion Mean Theory - prices eventually return to the mean (the average before the bubble). One of those new powers is the power to force the liquidation of a failing company, under its new Orderly Liquidation Authority. Bankruptcies filed soared.īut this time, it’s different, said CNBC’s Jim Cramer in December: “A booming housing market is good, even if the last one ended horribly.” He touted “reforms” in Dodd-Frank - the legislation that was enacted after the Great Recession to keep another one from happening - referring indirectly to the creation of new federal agencies such as the Consumer Financial Protection Bureau, the Financial Stability Oversight Council, the Office of Financial Research, and giving the Federal Reserve additional powers. One in four found themselves saddled with mortgages that exceeded the value of their homes. One in seven Americans lost their jobs and were unable to find new ones. The last time it stopped, it cost Americans nearly $13 trillion, according to Better Markets, which totaled up the losses four years later. But” he added, “at some point this has to stop.” Jeff Greene, the billionaire who became exorbitantly wealthy betting against the mortgage market before the real estate collapse in 2008, agrees: “There’s so much money in people’s … bank accounts that it’s just driven prices of everything higher. In his interview on Yahoo Finance Live, Shiller compared the rate of price increases to those seen in the run-up to the Great Recession: “There is excitement and people are talking and some people are bidding way more than the asking price.” This drives up demand further and prices continue to skyrocket.” Consumers expect prices to increase further, so everyone wants to buy a home as quickly as possible. As the prices start rising, speculation begins to take effect. when there is a shortage of inventory and an increase in demand. As Emily Huddleston stated on behalf of the real-estate brokerage firm Redfin, “a housing bubble occurs when home prices rise at a rapid rate to a level of instability. The reasons behind a housing-market bubble include: an increase in economic activity, as people suddenly have more income to spend low mortgage interest rates loose lending practices new mortgage products, which reduce monthly house payments supply that can’t keep up with demand and speculators entering the market.Īnother reason for the bubble relates to what author Charles Mackay penned in his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, about the fear of missing out (FOMO).
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