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Goldman Sachs: 3 reasons housing is not in a bubble

Though not likely to grow, either

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The increase of the price of assets, primarily in real estate and equities, could be considered by some to foreshadow another economic bust.

But not at Goldman Sachs [GS], according to economists Jan Hatzius and Jari Stehn in a note Monday morning to clients.

“Most economists would agree that preventing another financial crisis should be a central goal of macroeconomic policy,” they wrote. “But identifying a crisis in advance is difficult.”

But they gave it a shot anyway and examined data for 20 advanced economies dating back to 1985, paying special attention to “more economically costly busts that involve not only a market downturn but also a recession.”

Hatzius and Stehn said that by examining the economic data from the past three decades, there are three strong indicators that housing in the United States and the economy in general are not in immediate danger of collapse. However, it's important to note that while the forecast for the economy is positive, the outlook for the housing market is not overwhelmingy positive and near-term indictors only suggest minor improvement, Fannie Mae said in its latest economic outlook report.

Using data from the International Monetary Fund, the Goldman analysts defined “a housing bust as a year-to-year decline in the quarterly average of real housing prices of at least 5%, and an equity bust as a decline of at least 20%."

And here are the three reasons they don’t expect that to happen:

1. The stock market is just fine

“A garden variety equity bust is often simply the counterpart to a prior period of strong price appreciation and high market volatility. In contrast, a recessionary equity bust is typically associated with fundamental economic imbalances such as big credit buildups, excessive investment, and periods of low volatility that fuel imprudent risk-taking.”

2. Credit levels are fine, too

“Credit growth is the most important predictor of house price busts, especially when we focus on busts that involve a recession. House price busts have also tended to follow periods of high inflation, high equity volatility and large current account deficits, although all of these effects become less pronounced when we focus on recessionary busts.”

3. Macroeconomics seem stable

“The current picture looks reasonably reassuring from a macroeconomic perspective. The runup in equity prices since 2009 has modestly raised the estimated risk of an equity bust from low to near-average levels. However, the risk of a recessionary equity bust or any kind of housing bust remains low. The key reason is the weakness of credit growth in recent years.”

However, it should be noted that these point are delivered with a very important caveat:

"Despite these intuitive results and the high levels of statistical significance of some of our explanatory variables, crisis prediction remains a difficult exercise. Even on an in-sample basis, our models generate significant numbers of both type I errors (missed crises) and type II errors (false alarms). The implication is that models such as ours can play a useful role for policymakers, but only as part of a broader monitoring regime for financial stability.”

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