Rising interest rates and higher house prices would normally cool down a hot real estate market, but the national and local real estate scene continues to heat up.
Researchers at the Federal Reserve Bank of Dallas worry that the fear of missing out, colloquially known as FOMO, is creating a buying snowball effect that, if left unchecked, could lead to a real estate bubble.
The current market, with higher prices and other factors not causing a slowdown, is moving away from market fundamentals, they found, suggesting buyers’ exuberance in the form of fear of missing out is driving the current trend .
“The resulting fundamentally higher house prices may have triggered a wave of exuberance from new investors and more aggressive speculation from existing investors for fear of missing out,” the researchers said.
“Expectation-driven explosive appreciation (often referred to as exuberance) in real house prices has many consequences,” they continued, “including misallocation of economic resources, skewed investment patterns, individual bankruptcies and broader macroeconomic impacts on growth and jobs.”
The paper then described how “this self-fulfilling mechanism leads to price growth that can become exponential (or explosive),” leading to even greater misalignment until policymakers step in, investors become cautious, or “even too of bankruptcy”.
Locally, the momentum of the market is reflected in astronomical price growth — the average selling price of a home in the Tri-County area is $450,000, according to data from RedFin, up 20% year over year.
Market fundamentals and the housing market
The biggest concern for researchers is how the housing market is deviating from basic market fundamentals like mortgage rates, inventory and income.
The researchers used data sets from the International Housing Observatory to find out whether buyer exuberance plays a role in high house prices. From there, they marked which periods saw significant levels of buyer exuberance. Researchers warned that the last time the housing market experienced such exuberance was before the 2008 crash.
When asked about the trend, Ken H. Johnson, a real estate economist at Florida Atlantic University, said, “I think there are other factors, but this fear of missing out is one of the most notable ones. We saw this in Miami around 2005 where people were buying and there was really no financial reason to buy.”
consumer behavior and high prices
Emotions, whether positive or negative, play one of the most important roles when it comes to consumers and their purchasing decisions, said Dr. Khaled Aboulnasr of Florida Gulf Coast University. Emotions can also cloud the perception of consumers when making decisions.
“Sometimes when you’re unrealistically optimistic, or when you’re too scared and anxious, you may not be able to weigh the true risk of your decision,” Aboulnasr added.
Potential buyers watched as prices rose and housing availability fell while the rental market grew brutally. All of this leads to frustration.
“At this point, they feel like it’s harder, especially when you’re applying for a mortgage, and they’re so disadvantaged compared to the cash buyer,” he said. “It becomes a much more powerful motivator of behavior.” In other words, it’s tempting to think that if you get a chance at a house, you’ll take it.
Other motivations include forgoing lower mortgage rates, which can make home ownership unaffordable when interest rates rise, and fear of not being able to save for home ownership when rents rise.
Many buyers have seen houses they once deemed too expensive become even more expensive, leading them to fear they could miss out on further equity gains by waiting out the housing market, added Whitney Dutton of Dutton Group in Fort Lauderdale.
“People worry less about finding the perfect home than they worry about losing it[ing] out,” Dutton said. “They worry if they don’t pay for it [amount] Now it’s going to be more overpriced next year.”
The volatile rental market is also adding to buyer anxiety. “There are people who have been renting for a couple of years and think they would rent short-term until prices drop. Now they think that’s not going to happen,” Dutton added. And as their ability to buy has dwindled, landlords have been aggressively raising rents — rents are up over 30% since last year, while a fixed-rate mortgage would have been relatively stable.
Will this lead to another real estate bubble?
Although 2008 saw a bust both nationally and locally, market forces are somewhat different today. If there is a market correction, a Dallas researcher said, it won’t be the magnitude of the last crash, largely because the forces behind today’s market involve low inventories rather than excessive borrowing.
Florida Atlantic University researchers previously said that buying in the current boom could prove a risky decision, as homebuyers may buy near the peak of the market and it could be years before they see a return on their investment.
And the current South Florida real estate market is unlikely to go bust, though prices will eventually normalize, said Ken H. Johnson, a real estate economist at Florida Atlantic University.
“Some cities will fare differently,” he said. “If you’re living in a stock shortage and expected population growth,” he said while describing South Florida, “I don’t think you’re going to see a real estate crash.”
Federal Reserve Bank of Dallas economist Enrique Martinez Garcia made a medical analogy to her work that indicates exuberance driving an imbalanced market. “The chances of achieving full resolution and minimizing patient impact are better when you can quickly identify signs of the problem and act sooner. Our baseline scenario would therefore be greater awareness of the risk of unsustainable price increases, which can help investors become more cautious about the prospects for sustained price increases at current prices.”