Could the Housing Bubble Reinflate?

By Megan McArdle

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

My baseline scenario for the U.S. included a rapid increase in the number of multifamily housing units and a general return to renting.

However, a few factors are combining to make me think that an alternate scenario, one in which the single-family housing bubble returns, is increasingly likely.

First, multifamily starts simply aren't increasing as fast I thought they would. This means that rent pressure will be even more severe, and quite plainly there simply won't be enough apartments to absorb all of the newly forming families.

Second, no permanent solution to the global savings glut has been offered, and with austerity across Europe and deficit cutting on the agenda for the United States, the fundamental problems will only increase.

Third, Fannie Mae and Freddie Mac are considering bulk sales of foreclosed properties that will potentially slow the stream of distressed properties onto the market.

All of these factors combined mean that single-family home prices may stabilize in the near future. However, given the dynamics in the credit markets, stable prices do not seem like an equilibrium. Once prices stabilize the incentive to begin massively expanding credit to potential borrowers will be enormous and is likely to reignite.

I would tend to think it's unlikely that we will get the kind of price appreciation we saw the first time around. However, it is not impossible, and it's certainly possible to get a strong uptick in construction.

Also, I'd like to point out now that while a return of the housing bubble would prompt concerns that regulation has not gone far enough to curb abusive lending practices, it is not clear to me that any regulation would successfully stop this process. 

This article available online at:

http://www.theatlantic.com/business/archive/2012/04/could-the-housing-bubble-reinflate/255725/