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Does the Rise in Housing Prices Suggest a Housing Bubble?

House prices have risen rapidly during the pandemic, increasing even faster than the pace set before the 2007 financial crisis and subsequent recession….

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This article was originally published by Liberty Street Economics

House prices have risen rapidly during the pandemic, increasing even faster than the pace set before the 2007 financial crisis and subsequent recession. Is there a risk that another dangerous housing bubble is developing? This is a complicated question, and the answer has many components. This post, the first of two, provides a more detailed look at the recent rise in home prices by breaking it down geographically, with a comparison to the pre-2007 bubble. The second post looks at the potential risks to financial stability by comparing the currently outstanding stock of mortgage debt to the period before the financial crisis and projecting defaults should prices decline.

The Sharp Rise in Housing Prices during the Pandemic

The U.S. economy shut down in March 2020 due to the pandemic. Yet, by the summer housing prices started to rise sharply despite high unemployment. How similar is this to the early 2000s? We would be worried if the housing market were playing out exactly as it did in the prior boom. In the time series, we aren’t there yet: so far, we’ve had about one year of double-digit price growth, compared to the national average compound annual growth rate of more than 14 percent between 2003 and 2005.

Home Prices Are Rising Faster Now than during the Bubble

Source: CoreLogic Home Price Index, January 2003-June 2021.

Spatial Patterns of Home Price Growth

What about trends at the regional level? It turns out that the boom is taking place in different places within and across metro areas this time around. For most places, recent home price growth has been even stronger than during the previous boom: 79 percent of metropolitan areas in our data saw higher growth rates during the pandemic than during the peak years 2003-05. Of the thirty metropolitan areas containing the most populated cities in the country, 63 percent saw higher growth during the pandemic compared to 2003-05. In the chart below, we plot a 45-degree line, colored in gray, to differentiate which of the metropolitan areas with the largest population saw their fastest growth during either the pandemic or the housing bubble. Austin, Charlotte, Seattle, and Atlanta are a few metropolitan areas above the 45-degree line, meaning they have had higher growth rates during the pandemic. On the other hand, Las Vegas, Los Angeles, Miami, and New York had higher growth rates during 2003-05 and are below the 45-degree line. Some areas, however, saw similar paces of growth: Sacramento had minimal variation between its pandemic and housing bubble growth rates, putting the city close to the 45-degree line.

At the regional level, the northeast and south have positive trends in the graph, meaning that price increases are positively correlated in the two boom periods, whereas the midwest and west have slightly negative trends. The midwest points are clustered between growth rates of 10-20 percent for the pandemic and between 0-10 percent for 2003-05, whereas the other regions are more spread out. The west has the majority of its points above the trendline, while the south has most of its points near or below the trendline. The northeast points have the strongest positive relationship when compared to the other regions.

The blue regression line shows there is a positive relationship in the whole data set between house price growth during the housing bubble and the pandemic, meaning metropolitan areas that had high annual growth between 2003-05 saw higher growth rates during the pandemic, and vice versa. But note how flat the regression line is and how far away most of the dots are from the line, suggesting the relationship is weak. Many metropolitan areas that experienced fast-growing housing prices in 2003-05 have had slower growth rates during the pandemic and vice versa.  

Most Metro Home Prices Have Grown Faster during the Pandemic than during 2003-05

Source: CoreLogic Home Price Index.

Note: Each city represents the home price index of its respective metropolitan statistical area.

House Prices in Urban Areas Have Been Growing More Slowly than in Suburban and Rural Areas

The data above cover metropolitan areas and include both urban and suburban housing. A breakdown along these lines shows that house prices in urban areas have grown at a slower rate than those in suburban areas during the pandemic. To arrive at our urban classification, we first define the zip code that has the highest employment density, which we call the employment hub. We categorize zip codes as “urban” if they are within five miles of the employment hub, belong to a metropolitan statistical area, and have a population density greater than the 95th percentile. For suburban areas, we categorize zip codes as “suburban within 5/10/15/15+ miles” if they are within 5, 10, 15, or 15+ miles of the employment hub and if they are not already classified as urban (or any other suburban category).

As seen in the chart below, urban areas defined in this way have usually had the higher year-over-year house price growth compared to suburban areas, but starting around November 2018, these urban areas began to see lower rates of growth compared to suburban areas. Once the pandemic took hold in March 2020, urban areas did see a sharp increase in price growth, but suburban areas grew much faster and are above 15 percent year-over-year growth, whereas urban areas are around 10 percent. There are exceptions to even the relatively modest growth in urban areas: Manhattan (New York County) saw a price decline of 4.3 percent year over year in June, the largest county price decline nationwide.

Of course, many factors other than relative location may affect price growth. But urban classification is a significant characteristic even controlling for some of these other factors. The significant lag of home price growth in the past year isn’t attributable to zip code income or the level of home prices before the pandemic. When we control for these factors, it turns out that dense urban areas had been growing at a pace close to that of other parts of metro areas, until 2020 when they fell way behind.

Urban Home Prices Have Underperformed during the Pandemic

Source: CoreLogic Home Price Index.

There are also regional differences within urban areas. The northeast is not growing as rapidly as the midwest, west, and the south. Up until the end of 2020, all regional lines were following similar trends throughout the pandemic. At the beginning 2021 the west, south, and midwest continued to grow rapidly while the northeast began to see a slight stagnation in growth. These regional differences may have to do with the different rates of growth of cities in these areas compared to cities in other areas, and this shows how the urban classification can manifest differently depending on the region.

Urban Zip Codes Have Slower Home Price Growth in the Northeast

Source: CoreLogic Home Price Index.

Although prices are increasing rapidly nationwide, the data show we are not simply repeating the housing market bubble of the early 2000s during the pandemic. This boom is taking place in different metro areas and in different locations within metros. Still, home price growth in excess of 15 percent per year can’t be sustained forever, so a remaining question is how price growth will normalize and what the consequences of a decline in prices could be. We turn to this question in our next post.

Andrew Haughwout is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Belicia Rodriguez is a senior research analyst in the Bank’s Communications and Outreach Group.

How to cite this post:
Andrew Haughwout and Belicia Rodriguez, “Does the Rise in Housing Prices Suggest a Housing Bubble?,” Federal Reserve Bank of New York Liberty Street Economics, September 8, 2021, https://libertystreeteconomics.newyorkfed.org/2021/09/does-the-rise-in-housing-prices-suggest-a-housing-bubble.

Related Reading
Mapping Home Price Changes (interactive)
Keeping Borrowers Current in a Pandemic (May 2021)
Do People View Housing as a Good Investment and Why? (April 2021)


Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Economics

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies…

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UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies from operating. The latest is slaughterhouses that use carbon dioxide, a byproduct of fertilizer derived from natural gas. 

Richard Griffiths, chief executive officer of the British Poultry Council, told Bloomberg surging natural gas prices is a massive blow for poultry companies, which frequently use a byproduct of fertilizer production -- carbon dioxide -- to incapacitate birds at slaughterhouses.

CO2 supplies are incredibly tight, Griffiths said, adding that any further shortages could create massive headwinds for the industry and hinder chicken production. Already, weekly chicken output has dropped 5-10%, and Christmas turkey production could drop by a fifth. 

The unintended consequences of natural gas shortages are the effects on the food industry and how it may result in rising meat prices if slaughterhouse output continues to decline. 

On Thursday, we outlined how CF Industries Holdings' fertilizer plants, one in Billingham and another in Ince, suspended operations "due to high natural gas prices." 

"I would expect it to be having impacts very quickly," Griffiths said by phone. "At the moment, we've got all the Brexit effects, including labor shortages, all the Covid add-ons. And now, we're seeing these supply-chain problems emerge at a time when we really don't need it." 

Energy inflation could be a company's worse nightmare in the UK -- prices for the fuel have already doubled this year, while power costs are on a record-breaking run thanks to the lack of renewable energy output

More companies could be impacted by soaring natural gas prices and elevated electricity prices. This problem isn't likely to fade anytime soon as gas inventories remain low ahead of the winter season. 

All of this is feeding into inflation across the continent. European Central Bank President Christine Lagarde recently said energy markets are a significant driver in higher inflation. To solve this, Germany has to certify Russia's Nord Stream 2 to begin receiving shipments - but as we recently noted, that could take months and may suggest European inventories won't be resupplied in time for winter. 

    Tyler Durden Sat, 09/18/2021 - 07:35
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    Economics

    US stocks close in a sea of red as tax hike fears grow

    US stocks closed the week in a sea of red on Friday September 17 after technology shares led the broad losses across segments and tax hike fears dragged…

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    US stocks closed the week in a sea of red on Friday, September 17, after technology shares led the broad losses across segments and tax hike fears dragged the benchmark indices down.

    The S&P 500 fell 0.91% to 4,432.99. The Dow Jones fell 0.48% to 34,584.88. The NASDAQ Composite Index declined 0.91% to 15,043.97, and the small-cap Russell 2000 was up 0.18% to 2,236.87.

    Markets have been volatile this week amid mixed global cues. Loses in the Asian markets over worries of slow economic recovery and recent geopolitical developments weighed on investors’ minds. The tech-savvy Nasdaq declined the most.

    In addition, the recent retail sales and unemployment data offered mixed signals about the US economy. While retails sales were up in August, jobless benefits claims rose noticeably last week.

    Meanwhile, lawmakers were considering a proposal to hike corporate tax. The news could be worrisome for some investors as a tax hike may eat into the companies’ profits. Democrats are seeking to increase the corporate tax from the current 21% to 26.5%.

    Investors will now eagerly wait for the Fed’s monthly meeting next week. The central bank officials are expected to discuss the latest economic data as they continue with the stimulus tapering talks.

    All the S&P 500 stock segments stayed in the negative territory. Technology and communications services stocks were the biggest losers, pushing the index down. Stocks of vaccine manufacturers Moderna, Inc. (MRNA) and Pfizer Inc. (PFE) plunged 3.57% and 1.34%, respectively.

    Invesco Ltd. (IVZ) stock rose 5.71% after reports that it is in talks to merge with the asset management unit of State Street Corporation (STT). STT stock declined 2.47% in intraday trading.

    SmileDirectClub, Inc. (SDC) shares surged 12.92% after the stock was discussed on social media.

    AbCellera Biologics Inc. (ABCL) stock rose 2.53%, a day after the US Food and Drug Administration extended the emergency use authorization for its covid drug Bamlanivimab.

    In technology stocks, Apple Inc. (AAPL) fell 1.94%, Microsoft Corporation (MSFT) fell 1.65%, and ASML Holdings N.V. (ASML) declined 3.18%. Adobe Inc. (ADBE) and Cisco Systems, Inc. (CSCO) fell 1.75% and 1.19%, respectively.

    In communication stocks, Alphabet Inc. (GOOG) fell 2.08%, Facebook, Inc. (FB) declined 2.96%, and T-Mobile US, Inc. (TMUS) declined 1.19%. In addition, Sea Limited (SE) dropped 1.23%, and Snap Inc. (SNAP) advanced 3.08%.

    In the material sector, BHP Group (BHP) fell 4.46%, Rio Tinto Group (RIO) fell 3.02%, and Vale S.A. (VALE) fell 2.21%. Ecolab Inc. (ECL) and Freeport-McMoRan Inc. declined 2.01% and 4.10%.

    Also Read: Check these 5 oil and gas stocks with high price-to-earnings ratio

     

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    Gold futures were down 0.22% to US$1,752.85 per ounce. Silver decreased by 1.87% to US$22.367 per ounce, while copper fell 1.15% to US$4.2322.

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    US Dollar Futures Index increased by 0.33% to US$93.227.

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    Economics

    Victor Davis Hanson: The Death Of Science

    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American…

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    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American thinking.

    In empirical fashion, scientists advised us to examine evidence and data, and then by induction come to rational hypotheses. The enemies of "science" were politics, superstition, bias and deduction.

    Yet we are now returning to our version of medieval alchemy and astrology in rejecting a millennium of the scientific method.

    Take the superstitions that now surround COVID-19.

    We now know from data that a prior case of COVID-19 offers immunity as robust as vaccination. Why, then, are Joe Biden's proposed vaccination mandates ignoring that scientific fact? Dr. Anthony Fauci, when asked, seemed at a loss for words.

    Is this yet another of the scientific community's Platonic "noble lies," as when Fauci assured the public last year that there was no need for masks?

    He later claimed he had lied so that medical professionals would not run out of needed supplies.

    Fauci also threw out mythical percentages needed for herd immunity, apparently in an attempt to convince the public that it will never be safe until every American is protected from COVID-19 by vaccination only.

    And why was it that hard for the scientific community to postulate a likely origin of COVID-19 Some of the very scientists engaged in gain-of-function research oversaw an investigation with Chinese authorities. They confirmed the predetermined conclusion that the virus likely had little to do with gain-of-function engineering. And they saw little proof it was birthed in a Wuhan virology lab. Yet scientific opinion, emerging evidence and basic logic have suggested the opposite.

    How can the government hector citizens that they have a moral duty -- and soon a legal obligation -- to be vaccinated when it does not mandate vaccinations for unvetted refugees flying in from Afghanistan?

    How can the government medical community remain largely silent when an anticipated 2 million foreign nationals will cross into the United States in the current fiscal year -- almost none of whom are vaccinated or tested for COVID-19?

    Why do the media and government blame particular races for the delta variant outbreak on grounds that they were insufficiently vaccinated?

    Why wouldn't officials simply urge the Latino and Black communities to be vaccinated as quickly as possible?

    Data shows that both groups have lower vaccination rates than white and Asian populations.

    Are woke political agendas discrediting science and losing public health?

    We saw just that in June 2020, when more than 1,200 "health care professionals" signed a petition demanding exemptions from lockdowns and quarantines for Black Lives Matter protesters marching en masse. And they concocted medical excuses such as "vital to the national public health" to insist that violating quarantines was less unhealthy than not pouring into the streets.

    Why did presidential candidate Joe Biden and his running mate, Kamala Harris, warn the American people on the eve of vaccination rollouts that an inoculation under the Trump administration could be unsafe, thereby undermining confidence in vaccines?

    Why was the medical community largely silent about such dangerous sabotaging of new vaccines, but months later became vociferous in warning the public that any doubts about the safety of these Operation Warp Speed vaccinations were scientifically misplaced? Was there a medical breakthrough on Jan. 20, 2020, to alter their consensus?

    From rewarding wokeness in medical school admissions to the peer reviewing of scientific papers, the anti-scientific mania has polluted scientific endeavors.

    "Critical race theory" would preposterously tell us that we need racism to fight racism.

    "Critical legal theory" ludicrously claims that laws have no rational basis but simply reflect power inequities.

    "Modern monetary theory" defies millennia of evidence and basic logic in stating that governments can simply print money without worrying about balancing expenditures with revenues or inflating the currency to ruination.

    Corporations are now asked to substitute a new woke agenda theory -- "Environmental, Social and Corporate Governance (ESG)" -- in lieu of market realities, rules of investment and economic data.

    Science is dying; superstition disguised as morality is returning. And we'll all soon become poorer, angrier and more divided.

    Tyler Durden Fri, 09/17/2021 - 22:20
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