The COVID-19 pandemic has fueled the sharpest rise in global housing prices seen in two decades. During
Question:
The COVID-19 pandemic has fueled the sharpest rise in global housing prices seen in two decades. During 2020, in the pandemic's earlier stages, consumer spending was down amid stay-at-home orders, setting the stage for what was to come.In the spring of 2021, the optimism provided by vaccinations and reopening mea- sures fueled economic growth and consumer spending; this trend in consumer attitudes, coupled with relatively cheap mortgages, led to a renewed interest in home buying. But that interest, paired with a low supply of houses available for sale a problem that predates the pandemic—results in a significant surge in housing prices. Of course, housing prices cannot continue to rise at such an alarming rate forever, leading some to fear the presence of a housing bubble that could result in a crash like that in 2008.
Though housing prices will likely drop after such an alarming spike, there is reason to believe, this time around, that we are not on the cusp of another global financial crisis. The 2008 crash was preceded by the growth of the subprime mortgagemarket, whereby lenders made home loans available at low monthly rates that would rise after a few years—to borrowers likely to default. When the once-promising housing market (which led borrowers to believe they could always sell their homes and turn a profit) took a downturn, home- owners defaulted en masse, fueling a financial crisis.
This time around, however, there are key differences: unlike in the mid-2000s, when there was widespread overbuilding, homes are now in short supply and builders are exercising caution. The other important difference is that lending looks different this time around: the federal government has since cracked down on predatory loans to buyers with little income, so the kind of lending practices that begat the 2008 crash are now prohibited. Jamie Dimon, CEO of JPMorgan Chase, recently spoke to this distinction, noting: "Unlike in '08 and '09, when there was tremendous leverage and bad mortgage underwriting,there is not much leverage and much better mortgage underwriting."
Discussion Questions
To what extent did pandemic conditions prime the housing market for the current boom?
What do you think of fears that we are currently in a housing bubble similar to the one in 2008? Are they valid? Why or why not?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw