Original title: soaring Real Estate Market: another Price Bubble is forming? Will it become a familiar nightmare in the financial world?

Source: FX168

In the post-COVID-19 period, inflation has become a topic that can not be ignored, and prices have risen to varying degrees in the areas of clothing, food, housing, transportation and so on, among which the real estate market has attracted more and more attention.

In this regard, Syed Zain Abbas Rizvi, an active current affairs writer, wrote an article to analyze it, as follows:

There is no doubt that the rebound after the pandemic has been stronger and much faster than expected. The confused Fed and booming stock markets mark a new normal, and inflationary pressures define the reality of economic recovery.

However, while inflation appears to be transitional in nature, rising demand is breaking records in many markets. No market can compare with the real estate market, the dark horse in the transaction.

The surge in the real estate market is astonishing, to say the least. Across the United States, house prices have risen to double digits compared with last year.

Compared with the situation after the financial crisis in 2008, the peak of demand seems more dazzling. The pandemic is a completely different shock. Today, the median house price in the United States is close to $350000, double what it was a decade ago.

While such exponential price surges are often problematic, the reality is much safer than crisis signals. Although it is true that housing costs are rising faster than the average income in the economy, there is no bubble in the real estate market.

House prices have risen sharply since the pandemic last year, mainly because more savings have been injected into a market where supply is relatively fixed and value is stored safely in uncertain times.

Fixed mortgage rates plummeted to an all-time low as the Fed embarked on a generous stimulus package worth $120 billion through extensive purchases of mortgage-backed securities in the open market. Coupled with lower interest rates and excess savings accumulated through massive unemployment benefits and rent support, mortgage rates fell sharply below the 3% target.

Such attractive mortgage rates, as well as a grace period for mortgage and student loan repayments, have helped fuel huge demand.

However, despite the rise in demand, housing supply has almost disappeared as construction faces intermittent shutdowns, price shocks in the timber market and a weak labour market recovery.

In addition, the bottleneck in housing supply narrowed further, with the average house for sale falling since last year, mainly due to the suspension of mortgage foreclosures to avoid panic in the housing market during the pandemic.

To be sure, the economy and its elements have exceeded the expectations of the wisest economists of our time.

The obvious shift in employment to a completely virtual pattern has further weakened the demand for housing. Such a period of leisure and convenient connections have led to the migration of the urban population to the suburbs and smaller cities. It is reported that apartment residents in megacities pay a higher price for ownership than the listing price. These bad deals have added fuel to the already flaming market, with about 3/4 of homes sold at 10-15 per cent higher than the historical list price.

While the surge in demand is staggering, the mechanism driving up prices is easy to understand. As a result, it is difficult to compare the real estate market with the real estate bubble that led to the financial crisis a decade ago.

First, the price bubble inflates when the sole purpose of the surge in demand is the incentive to sell property to profit from the bull market. In reality, these houses are bought under relatively strict mortgage underwriting agreements.

According to the report, most of the houses that have changed hands today are profitable by investors through renovation, rather than in the soaring market.

Moreover, while the market is certainly overvalued, a housing crash is not imminent, as the job market is rebounding as unemployment has fallen significantly over the past few months. Coupled with a strong economic recovery, mortgage defaults seem unlikely. However, a price correction is imminent.

The Fed is expected to scale back its asset purchases in the coming months as it hints that inflation is a worrying by-product of rapid economic growth. Coupled with the normalization of interest rates, mortgage rates will eventually rise as housing demand adjusts house prices. However, the expected activities and measures will not take effect in the short term, nor will they cool such an overheated economy without any impact.

The housing market is still extremely undersupplied, which is a major obstacle to economic recovery. Freddie Mac, the federal mortgage company, estimates that nearly 3.8 million new homes will be needed to meet soaring demand by the end of the last fiscal year. However, the recently passed bipartisan infrastructure bill completely cancelled the $326 billion originally planned by Biden to provide comfortable housing across the United States. So while a modest price correction is not expected to cause significant damage to the economy as a whole, the market is clearly at odds with the traditional estimates of experts.

An emerging threat is the spread of novel coronavirus's Delta variant. If the mutated virus succeeds in invalidating the vaccine, the infection could eventually push the United States into another blockade. Then comes the problem of unemployment. This time, however, it will be followed by a legitimate real estate bubble. The Fed will have no choice but to stop foreclosures again, introduce more stimulus and face another round of farce from investors. And, with no plans for competitive supply in the short term, the property market could become a familiar nightmare in the financial world.