Usually higher interest rates and higher housing prices cool the hot housing market, yet the national and local real estate scenes continue to unfold.
Researchers at the Federal Reserve Bank of Dallas worry that fear of missing out, known colloquially as FOMO, creates a buying snowball effect that could lead to a housing bubble if left unchecked.
They find that the current market, where high prices and other factors do not lead to a slowdown, is moving away from market fundamentals, indicating that buyer abundance, in the form of fear of missing out, is driving the current trend.
The resulting fundamentally driven home price hike may have fueled a wave of panicked exuberance involving new investors and more aggressive speculation among existing investors, researchers said.
They went on to say, “The explosive, expectations-driven (often called exuberance) rise in real home prices has many consequences, including misallocation of economic resources, distorted investment patterns, individual bankruptcies, and broad macroeconomic effects on growth and employment.”
The paper then described how “a self-fulfilling mechanism leads to price growth that may become exponential (or explosive),” leading to further disruption, until policy makers step in, and investors exercise caution, “or until the crash occurs.”
Market fundamentals and the housing market
The biggest area of concern for researchers is how the housing market differs from basic market fundamentals such as mortgage rates, inventory, and income.
The researchers used datasets from the International Housing Observatory to see if the abundance of buyers plays a role in rising home prices. From there, they identified the time periods that experienced significant levels of Jupiter abundance. The researchers warned that the last time the housing market saw such an abundance was before the 2008 crash.
When asked about this trend, Ken H. Johnson, a real estate economist at Florida Atlantic University, said, “I think there are other factors, but this fear of missing out is among the most notable. We saw this around 2005 in Miami where people were buying and didn’t There was no financial reason to buy.”
Consumer behavior and price hikes
Dr. Khaled Abul-Nasr of the University of Florida Golf Coast said: When it comes to consumers and their purchasing decisions, emotions, whether positive or negative, play one of the most important roles. Emotions can also cloud consumers’ perceptions when making decisions.
“Sometimes, if you are unrealistically optimistic or if you have a lot of fear and anxiety, this may not allow you to assess the real risks of the decision you are making,” Abul-Nasr added.
Potential buyers had to watch prices rise and housing availability fall, while the rental market grew wildly. All this leads to frustration.
“At this point, they feel it is more difficult, especially if you are applying for a mortgage, and they are at a disadvantage for a cash buyer,” he said. “It becomes a much stronger motivator for behavior.” In other words, it’s tempting to think that if you get a chance at a house, you take it.
Additional motivations include losing low mortgage rates, which can make a home unsustainable as they rise, as well as the fear of not being able to save for a home as rents rise.
Whitney Dutton of the Dutton Group in Fort Lauderdale added that many buyers have watched the homes they once gave up for being too expensive, leading them to fear they could lose more stock gains if they wait for the housing market to finish. , Florida.
“People are less worried about finding that perfect home than they are about losing them,” Dutton said. “They’re worried that if they don’t pay that[amount]now, it will go up next year.”
The volatile rental market is also increasing buyer fears. “There are people who have been renting for two years, thinking they will rent in the short term until prices come down. Now they think it won’t.” , whereas a fixed-rate mortgage would have been relatively stable.
Will this lead to another housing bubble?
Although 2008 saw a crash, both nationally and locally, today’s market forces are somewhat different. A researcher in Dallas said that if any market correction occurred, it would not be as large as the recent crash, mainly because the forces behind the market today include low inventory, rather than excessive borrowing.
Florida Atlantic University researchers previously said buying in the current boom may be a risky decision, as homebuyers are likely to buy near the peak of the market, and it may take years before they see a return on their investment.
Ken H. said: Johnson, a real estate economist at Florida Atlantic University, said a collapse in the current South Florida housing market is unlikely, although prices will eventually begin to return to normal.
“Some cities will perform differently,” he said. “If you’re living in short supply and projected population growth, I don’t think you’re going to have a housing collapse,” he said in describing South Florida.
From their work indicating abundance driving an unbalanced market, Dallas Fed economist Enrique Martinez Garcia made a medical analogy. “The chances of delivering a complete cure and minimizing the impact on the patient are better when you are able to detect signs of the problem quickly and act early. Thus, our base scenario would be that greater awareness of the risks of unsustainable price growth could contribute to investors becoming more cautious about the prospects for Prices will continue to grow at the current rates.