Bursting Housing Bubble Despite Falling Prices

BuRstiNg Housing Bubble Despite Falling Prices

 

U.S. housing prices may decline "a little" within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.

 

Based on an analysis of housing futures and options and derivatives of housing-related company shares, "market participants expect home prices to decelerate sharply or actually decline a little within the next year," wrote J. Benson Durham, an economist with the Fed's monetary affairs division. However, the anticipated drop in prices "is mild compared to some estimates of the purported overvaluation of the housing market," he added.

 

Mr. Durham cautioned that deep and liquid markets needed to signal future home-price trends don't fully exist and that housing futures and options have only been trading on the Chicago Mercantile Exchange since May 22. Still, implied volatility on CME housing options are greater than the historical average, "which suggests that investors see more risks to home prices going forward," he wrote. That higher uncertainty, however, is "generally inconsistent with the perception of a "bubble,'" he added.

 

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