Housing Bubble?
While most areas of the country are experiencing housing price appreciation, not all are bubbles, according to Freddie Mac CEO Richard Syron. However, some local markets, especially in higher end real estate, are overpriced, he says, and could be headed for a decline.
Freddie Mac (FRE) Chief Executive Richard Syron said Thursday that certain urban areas nationwide are seeing a real estate housing "bubble" particularly at the high-end of the market, such that "the resulting local corrections, taken together, will have an impact on overall economic growth by dampening consumption."
During his speech at the Chief Executives' Club of Boston, Syron remarked, "Now the term "bubble" doesn't simply mean large price increases—even if they go on for years. It also requires a level of heightened speculation that becomes unhinged from economic fundamentals. In the case of housing, the key fundamentals include local jobs and incomes; the supply of existing homes and land; regulatory limitations; and of course, the cost and availability of mortgage money... Given the underlying fundamentals, we do not see a nationwide decline in housing prices. There's been no such collapse since the Great Depression. And it's just not in the cards today."
He continued, "I get asked the bubble question all the time as I travel around the country. Candidly, the right answer depends on which city I'm in. Here where we're standing, in Boston, we have seen a bit of a bubble, particularly at the high end. More broadly, our research tells us that in the last two years, the average home value in New England is up 28 percent – but only about a third of that increase can be attributed to fundamentals such as income and population growth."
"On the other hand, throughout most of the Midwest, the South and much of the nation, there plainly is not a housing bubble. I'm not in the business of issuing crystal ball predictions about the exact trajectory of house prices. But as an economist, I will say this. I believe we're seeing enough excess exuberance in enough markets so that the resulting local corrections, taken together, will have an impact on overall economic growth by dampening consumption," Syron added.
