Dallas Fed: Home prices lacked economic balance long before downturn
Home prices outpaced actual inflation in the decade leading up to the financial crisis, according to a report from the Federal Reserve Bank of Dallas.
Fed researchers Adrienne Mack and Enrique Martinez-Garcia said the 2007 global financial crisis was similar to the great moderation period of 1984 when comparing the two cycles on gross domestic product alone. But differences emerge when comparing them on home prices.
Volatility in home prices subsided somewhat after the 1984 slow down, but home prices continued to rise in the aftermath of the 2001 recession.
"By 2007, emerging strains in housing markets and financial turmoil plunged the world economy into a deep and protracted recession from which recovery is ongoing," the researchers wrote. "In the aftermath of that recession, the growth of real (inflation-adjusted) house prices appears to have moved out of step with the growth of real economic activity — indicating a possible break with the recent past."
The imbalance between economic growth and home prices first emerged in the 1990s, the report contends.
"The house price growth rate kept climbing until around 2005, even though real GDP growth didn’t similarly increase and even weakened around the 2001 recession," the researchers added. "This apparent divergence is somewhat less evident for the U.S., but it can be argued that house price growth in the U.S. also resumed in the 1990s and outperformed real GDP growth in the first half of the 2000s."
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