The Economy Is Down. Why Are Home Prices Up?

Many Americans will have heard stories about people fearful of the pandemic fleeing from crowded cities and driving up home prices in the rest of the country. But there is a much bigger tale to tell here.

Housing prices started rising before the pandemic arrived. They are rising on average in U.S. cities as well as in rural and suburban areas. They are increasing not just in the United States but also worldwide, regardless of how hard a country has been hit by the pandemic. And prices are at or near record highs not only for housing but also, despite recent market wobbles, for stocks and bonds.

This is a global market boom in the price of … everything.

The common factor is not the virus; it is so-called easy money. Led by the Federal Reserve in the United States, central banks have been lowering interest rates for decades, hoping to stimulate economic growth, but much of that newly issued money keeps flowing into financial markets. This unintended boost has accelerated drastically during the pandemic, as central banks roll out multi-trillion-dollar stimulus plans. According to my research, the valuations of stocks, bonds and housing have risen sharply this year to levels seen only around 2000 and 2008 — periods characterized by financial bubbles.

This is not good news for most people. Market manias have an alarming record of bringing down the wider economy and of widening wealth inequality. In 484 cities around the world whose home prices are tracked by Numbeo, which compiles user-generated data about consumer prices, home prices are now beyond reach for the typical family in more than 400 of them. The least affordable U.S. city is New York, where median home prices (despite falling during the pandemic) are still more than 10 times the median annual income.

Going back at least to the 1970s, housing had always slumped during recessions, both in the United States and worldwide. People lose jobs and stop dreaming of bigger homes. But in the second quarter this year, amid the worst global recession since the 1940s, housing prices were up a robust 4 percent worldwide, and that was before the boom really took off. Since May, new-home sales in the United States have climbed by 67 percent, and prices by 15 percent. The median price of existing homes in the United States recently passed $300,000 for the first time.

This surreal “boom in the gloom” is a government creation. As central banks flooded money into the credit markets, rates on 30-year mortgages, which had been falling for years, plummeted to record lows — under 3 percent in the United States and under 2 percent in Europe. If you are dreaming of riding out the pandemic in a larger home, cheap mortgages now beckon you to act.

For now, housing is a bright spot in a struggling economy. But when prices are shaped by easy money, as much or more than by genuine demand, the result is often a severely skewed allocation of resources. Already, many investors are buying homes not as a shelter but as an alternative to stocks and bonds, which are even pricier.

The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels. And when booms go bust, it takes time to unravel the bad debts, which ripple through the middle class, lengthening and deepening the resulting recession.

The response favored by many experts, including some Fed officials, is tighter regulation. But if regulators clamp down on mortgage lending, investors will borrow to buy something else — stocks and bonds, or even fine art, rare wines or some other exotic asset. When borrowing is nearly free, tweaking regulations will only shift money from one market to another.

For years, central banks said there was no reason to tighten monetary policy because there was no inflation. But as many economists have argued, there appeared to be no inflation because official indexes don’t adequately capture asset prices. The United States, for example, includes only rent and a “rental equivalent” for home prices in its official indexes, which makes them increasingly misleading: Rents have lagged behind home prices for years and have slumped further during the pandemic, pushing the official inflation rate even lower.

Central banks need to take the menace of asset price inflation more seriously and to give the threat of stock, bond and especially housing bubbles more weight in their policy deliberations. This would not prevent central banks from bailing out an economy in crisis, when other concerns prevail. But once a recovery begins, it would nudge central bankers to start shutting off the easy money spigot a bit earlier than they otherwise would have — before an “everything boom” like this one becomes a full-blown bubble.

Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, the author, most recently, of “The Ten Rules of Successful Nations” and a contributing opinion writer. This essay reflects his opinions alone.

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