Fed Study: Are Home Prices the Next Bubble?

A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.

Moreover, weaker economic conditions are unlikely to trigger a severe drop in home prices. Historically, aggregate real home prices have fallen only moderately in periods of recession and high nominal interest rates.

While such conditions could lead to lower home prices in states along the east and west coasts—areas where an inelastic supply of housing has made home prices particularly sensitive to changes in demand—regional price declines in the past have not had devastating effects on the broader economy.

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