A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.
The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.
“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.
Bair, who served as a federal regulator when the mid-2000s housing bubble popped, nearly taking down the entire financial system, said home prices today are “bubbly” following years of low mortgage rates.
A housing bubble can form when prices rise to unsustainable levels. This can be caused by speculative buying, as was the case during the sub-prime mortgage crisis when people who could not make the monthly payments on their mortgages were buying homes with very little money down. The bubble popped when home prices dropped and many people owed more on their home than it was worth.
A bubble can also be caused by irrational exuberance, in which a surge in prices leads to a buying frenzy.
“When rates were cheaper, a lot of people wanted to buy. You ended up with really frothy price increases. That was pretty predictable,” said Bair, who led the Federal Deposit Insurance Corp. from July 2006 until July 2011.
Although Bair said home prices need to correct downward, she’s not confident that will happen anytime soon because there’s still a shortage of homes on the market and she doesn’t expect the bubble to violently burst.
“If supply remains constrained, this could go on for some time,” said Bair, who last…