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Experts See Risk of a Housing Bubble Resulting from Fed Policies

May 8, 2013

Experts See Risk of a Housing Bubble Resulting from Fed Policies

A majority of real estate experts responding to a recent Zillow survey expressed some concern that the Federal Reserve’s current policies could lead to another housing bubble.

Only 4 percent of respondents are not at all worried about a bubble resulting from the Fed’s monetary policy that is keeping mortgage rates down. However, 48 percent see the Fed’s policies as “a little risky,” and the remaining 48 percent categorized the risk as “moderate to high risk.”

“How the Federal Reserve handles the eventual winding down of its policy of quantitative easing will be critical in determining if the current period of rapid appreciation is a benign bounce off the bottom or a more dangerous bubble being re-inflated,” said Stan Humphries, chief economist at Zillow.

The more than 100 survey respondents expect home prices to continue their upward trajectory this year and over the next few years. However, the general consensus is that price increases will slow after the next year or so.

Experts expect prices to end this year 5.4 percent higher than their level at the start of the year. After ending 2012 at $156,800, the median price would end this year at $165,280, according to this forecast.

From 2015 through 2017, experts suggest a more modest rise per year of 3.5 to 3.7 percent.

A cumulative rise of 22.3 percent is forecasted through 2017, according to Zillow’s survey.

The accelerated appreciation over the next year is “consistent with a market struggling to satisfy strong demand from buyers attracted by rock-bottom interest rates and improving economic conditions,” Humphries said.

However, as interest rates eventually move up from their current lows, price appreciation must slow or homes will “look very expensive relative to people’s incomes as it gets more costly to finance a home,” Humphries said.

The Zillow survey, conducted by Pulsenomics, also inquired about whether the definition of a qualified residential mortgage (QRM) should include a minimum down payment.

“Contrary to concerns expressed by certain policymakers, only a small minority of our expert panelists believe that including a minimum down payment requirement in QRM would pose a threat to the housing recovery,” said Terry Loebs, founder of Pulsenomics.

About 81 percent support the idea of a minimum down payment requirement, although a minority—about one-third—support a down payment requirement of 20 percent or more.

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