Could the bubble return? (economist)
KARL SMITH has written a provocative blog post this morning musing on the
potential return of a housing bubble. The conditions for stabilisation in
housing markets are right, he says; rents are rising and the new home pipeline
is remarkably bare. Price stabilisation is unlikely to be a stable
equilibrium, though:
> Once prices stabilize the incentive to begin massively expanding credit to
potential borrowers will be enormous and is likely to reignite.
>
> I would tend to think it’s unlikely that we will get the kind of price
appreciation we saw the first time around. However, it is not impossible, and
it’s certainly possible to get a strong uptick in construction.
It certainly appears probable that achievement of a real bottom for home
prices could touch off a series of feedback loops. One, as Mr Smith mentions,
is that mortgage standards may loosen, expanding credit to buyers. Standards
are quite tight at the moment; while prices are falling, the chances of
dipping underwater and becoming delinquent are relatively high, and banks have
been correspondingly cautious. More lending should mean more buying which
could soak up diminished inventory quite quickly, leading to rising prices.
That, in turn, …
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