Beginning a decade ago, America underwent a full-scale housing crisis. Mortgage payments weren't being met. Thousands of homes foreclosed. And millions lost their jobs.
While the housing market has been in recovery mode, there's talk that another housing bubble could arise. So how much cause for concern is there really? Chris Farrell, a Marketplace economics correspondent, joined us to explain some of our country's housing problems and what the forecast looks like in the upcoming year. The following is an edited transcript of our conversation.
David Brancaccio: So this is in the part in the movie where someone looks down at their screen and says, "Hmmm." And the "hmmm" is about: Is there a bubble inflating, do you think, with real estate prices in these United States?
Chris Farrell: Well, there's a group of people that think the answer is yes. I mean, when I've been thinking about bubbles I go, "bitcoin." But James Stack, he's a money manager based out of Whitefish, Montana, and he's well known for predicting the previous bubble in 2005.
Brancaccio: What's he saying now?
Farrell: Now he's saying, look, housing prices: record high. The homebuilder stocks — that was the best performing group last year. Another bubble is in the making. And so all of a sudden, people are starting to pore over the numbers and say, "Wait a second, should we be looking at real estate?" Because you know what, that really matters to the household balance sheet.
Brancaccio: All right, a bubble when it comes to house prices. Isn't that a little overinflated as a claim at this point?
Farrell: I think it is and Bill McBride, he also was very accurate in predicting the 2005-2006 housing market bubble. He's with Calculated Risk, and he says, look, you're just not seeing the kind of rampant speculation that you saw back in 2005. And you know, lenders are still reasonably conservative. And yes, prices are too high in parts of the country. But still, places like Cleveland are struggling to come out and see their prices appreciate.
Brancaccio: All right. But I say this twice a week: Trees don't grow to the sky. What are some headwinds for the real estate market?
Farrell: Boy, there are a number of headwinds. For 2018, we got the tax cuts. The deductions for state and local government taxes are going to hurt the high-end part of the market. And then, there's Jerome Powell: he's been confirmed by the Senate to be the head of the Federal Reserve. And he's clearly in the, "Let's raise interest rates" camp. And then I think housing prices in most parts of the country have gotten ahead of incomes.
Brancaccio: Which is a key thing, because when that is the case, maybe you should not be buying.
Farrell: Exactly. And so when it comes to your own household-personal finances, you don't want to be house-poor. Talk to anybody who a decade ago was house-poor, and how miserable that can be. So whether or not there's a bubble, if you are stretching your finances to buy, that's a signal not to buy.
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