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Aaron Brown

The Housing Market Is Hot But Certainly Not 'Unhinged’

Simple patterns in aggregated numbers provide no understanding as to why buyers are paying more for homes.

Housing is hot, but not unhinged.

Housing is hot, but not unhinged.

Photographer: David Paul Morris/Bloomberg via Getty Images

It’s a common observation that generals and central bankers are always ready to fight the last war. A good example is the recent blog post from researchers at the Federal Reserve Bank of Dallas that has gotten a lot of attention by sounding the alarm about an overheated U.S. housing market. The report, which represents the opinions of the authors and is not an official Fed position, said housing is “becoming unhinged from fundamentals” due to “fear of missing out” by buyers leading to “expectations-driven explosive appreciation.” This will cause a “misallocation of economic resources, distorted investment patterns, individual bankruptcies and broad macroeconomic effects on growth and employment.”

The support for these claims is underwhelming, consisting of charts such as the one below showing the ratio of average home prices to rents in blue, with the authors’ opinion of what that ratio should be, based on economic fundamentals like disposable income per capital and long-term interest rates. The last time housing prices were this much higher than the model prices, there was a housing bubble.