The Economy Is Down. Why Are Home Prices Up?


Going back at least to the 1970s, housing had always slumped during recessions, both in the United States and worldwide. People lose jobs and stop dreaming of bigger homes. But in the second quarter this year, amid the worst global recession since the 1940s, housing prices were up a robust 4 percent worldwide, and that was before the boom really took off. Since May, new-home sales in the United States have climbed by 67 percent, and prices by 15 percent. The median price of existing homes in the United States recently passed $300,000 for the first time.

This surreal “boom in the gloom” is a government creation. As central banks flooded money into the credit markets, rates on 30-year mortgages, which had been falling for years, plummeted to record lows — under 3 percent in the United States and under 2 percent in Europe. If you are dreaming of riding out the pandemic in a larger home, cheap mortgages now beckon you to act.

For now, housing is a bright spot in a struggling economy. But when prices are shaped by easy money, as much or more than by genuine demand, the result is often a severely skewed allocation of resources. Already, many investors are buying homes not as a shelter but as an alternative to stocks and bonds, which are even pricier.

The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels. And when booms go bust, it takes time to unravel the bad debts, which ripple through the middle class, lengthening and deepening the resulting recession.

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The response favored by many experts, including some Fed officials, is tighter regulation. But if regulators clamp down on mortgage lending, investors will borrow to buy something else — stocks and bonds, or even fine art, rare wines or some other exotic asset. When borrowing is nearly free, tweaking regulations will only shift money from one market to another.



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