Rising interest rates and higher home prices would normally cool a hot housing market, yet the national and local real estate scenes continue to run red hot.
Researchers at the Federal Reserve Bank of Dallas are concerned that a fear of missing out, colloquially known as FOMO, is creating a buying snowball effect that may lead to a housing bubble if left unchecked.
The current market, where higher prices and other factors are not resulting in a slowdown, is moving away from market fundamentals, they found, suggesting that buyer exuberance, in the form of fear of missing out, is driving the current trend.
“The resulting fundamental-driven higher house prices may have fueled a fear-of-missing-out wave of exuberance involving new investors and more aggressive speculation among existing investors,” said researchers.
“Expectations-driven explosive appreciation (often called exuberance) in real house prices has many consequences,” they went onto write, “including the misallocation of economic resources, distorted investment patterns, individual bankruptcies and broad macroeconomic effects on growth and employment.”
The paper then described how “this self-fulfilling mechanism leads to price growth that may become exponential (or explosive),” resulting in even greater misalignment, until policymakers intervene, investors become cautious, “or even a bust occurs.”
Locally, The market’s momentum is evidenced in astronomical price growth — the median sale price of a home in the tri-county area is $450,000, a 20% increase from the previous year, according to data from RedFin.
Market fundamentals and the housing market
The biggest area of concern for researchers is how the housing market is diverging from basic market fundamentals like mortgage rates, inventory and income.
Researchers used datasets from the International Housing Observatory to find out whether buyer exuberance is playing a role in steep housing prices. From there, they marked what time periods had significant levels of buyer exuberance. Researchers warned that the last time the housing market saw such exuberance was before the crash of 2008.
When asked about the trend, Ken H. Johnson, real estate economist at Florida Atlantic University, said, “I think there are other factors, but this fear of missing out is amongst the most notable. We saw this around 2005 in Miami where people were buying and there was really no financial reason to buy.”
Consumer behavior and high prices
When it comes to consumers and their purchase decisions, emotions, either positive or negative, play one of the most important roles, said Dr. Khaled Aboulnasr at Florida Golf Coast University. Emotions can also cloud consumers’ perception when making decisions.
“Sometimes if you are unrealistically optimistic or if you have too much fear and anxiety, it may not let you weigh the true risk of the decision you are making,” added Aboulnasr.
Potential buyers have had to watch prices rise and housing availability drop, all while the rental market grew brutal. It all leads to frustration.
“At this point, they feel that it is more difficult, especially if you are applying for a mortgage, and they are at such a disadvantage to the cash buyer,” he said. “It becomes a much stronger motivator of behavior.” In other words, it’s tempting to think that if you get a chance at a house, you take it.
Additional motivations include missing out on lower mortgage rates, which can make a home more unaffordable as they rise, as well as the fear of not being able to save up for a home as rents rise.
Many buyers have watched as homes they once passed on for being too expensive have become even more expensive, leading them to fear that they may miss out on more equity gains if they wait out the housing market, added Whitney Dutton with the Dutton Group in Fort Lauderdale.
“People are less worried about finding that perfect home than they are worried about lose[ing] out,” said Dutton. “They are worried that if they don’t pay this [amount] now is it going to be more over-priced next year.”
The volatile rental market also adds to buyer fear. “There are people who have been renting for a couple years, thinking they were going to rent in the short term until prices came down. Now they think that’s not going to happen,” Dutton added. And as their buying opportunities have withered, landlords have raised rents aggressively — rents have risen upwards of 30% since last year, whereas a fixed-rate mortgage would have been relatively stable.
Will this lead to another housing bubble?
Though 2008 saw a bust, both nationally and locally, market forces are a bit different today. If any market correction should happen, Dallas researcher said, it won’t be of the magnitude of the last crash, mainly because the forces behind today’s market include low inventory, rather than excessive borrowing.
Florida Atlantic University researchers previously said that buying in the current boom could prove to be a risky decision, as homebuyers are potentially buying near the peak of the market, and it could take years before they see a return on their investment.
And it’s unlikely that a bust will happen in this current housing market for South Florida, though prices will eventually start to trend back to normal, said Ken H. Johnson, real estate economist with Florida Atlantic University.
“Some cities will fare differently,” he said. “If you live in an inventory shortage and expected population growth,” he said in describing South Florida, “I don’t think you will see a housing crash.”
Of their work indicating exuberance driving an imbalanced market, Federal Reserve Bank of Dallas economist Enrique Martinez Garcia made a medical analogy. “The chances of providing a full remedy and minimize the impact on the patient are better when you are able to detect signs of the problem quickly and act earlier. Our base scenario would be, therefore, that greater awareness of the risk of unsustainable price growth can contribute to investors becoming more cautious about the prospects of continued price growth at the current rates.”