The FOMO Bubble

Apparently, a new housing bubble is forming. It is not caused by loose lending standards or subprime mortgage products, instead, the culprit is FOMO, according to a new report from the Dallas Federal Reserve…(Dallas Fed)

• NOT YET: The authors note that we are not in a bubble yet and that the home price growth we have seen of late has been caused by housing fundamentals. “Shifts in disposable income, the cost of credit and access to it, supply disruptions, and rising labor and raw construction materials costs are among the economic reasons for sustained real house-price gains.”

• CONCERNS: The fact that we are not in a current bubble doesn’t mean one can’t form under the same conditions. “…real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. 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.”

• WHAT TO WATCH FOR: Two things. 1) Price-to-rent ratio: The gap between the actual price-to-rent ratio and its fundamental-based level in the U.S. has grown rapidly during the pandemic and is, unfortunately, comparable to the run-up of the last housing boom. 2) price-to-income ratio: While there is no divergence yet, the authors are concerned that the rapid increase in the statistic close to the threshold during 2021 indicates that U.S. real house prices may soon become untethered from personal disposable income per capita as fiscal stimulus is sunset by the government.

It is important to note that this report is not arguing that we are currently in a bubble, only that there are signs one could begin if housing doesn’t cool off. This is arguably why mortgage rates are climbing and why the Fed is discussing reducing its balance sheet. I think everyone is aware we have avoided a bubble until now, but if the housing market doesn’t cool down the risk of a bubble forming increases dramatically. While no one wants to see a bubble form the report does note that a bubble popping would be nothing like we saw in 2008, “there is no expectation that fallout from a housing correction would be comparable to the 2007–09 Global Financial Crisis in terms of magnitude or macroeconomic gravity. Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom.”