Experts are worried about a possible new housing bubble on the horizon. According to a recent article in the Huffington Post, “The Emerging Markets Housing Bubble,” the pending rise of our interest rates could trigger international capital to revert back to the U.S. seeking higher and safer yields. Why? Because outflows from emerging market countries may very well bring about and burst a new bubble in housing markets in emerging economies, at least at the periphery of the global financial system.
We have witnessed a steep and highly synchronized decline in valuations since he 2008-09 global financial crisis in housing markets around the world. While in most advanced economies, housing prices contracted for a prolonged period both during and after the crisis, in emerging markets, housing prices suffered brief declines, recovered quickly and have kept rising since.
According to the IMF Global Housing Watch, home prices (and credit) in Brazil, China, and Turkey are still running well ahead of inflation. At the same time, income growth in these economies has slowed. In addition to high inflation, Brazil and Turkey have reported large deficits in their national incomes, which can result in foreign borrowing to spend beyond their means. In contrast, housing prices in India and Russia have already fallen as domestic political problems have contributed to cooling their respective housing markets.
Meantime, the ongoing transformation of the Chinese economy is challenging and far from complete. The country’s overvalued housing market could potentially become a systemic threat to financial stability if the easy credit that supports demand runs out of hands. In fact, the PBOC recently freed up more than $100 billion for its banks to lend by cutting its reserve requirement for the first time in two years.
In raising the interest rates here, the Fed would adjust the federal funds target rate for the first time since December 2008 cutting them to zero to fight the global financial crisis. The U.S. economy is now approaching full employment with real wages finally beginning to rise while headline inflation remains subdued thanks to falling energy prices.
Even in light of this good news, some economists are worried that the Fed may be repeating the same mistakes of 2002-2004 when they kept rates low for too long, contributing to the build-up of credit expansion and housing market vulnerabilities that lead to the crisis.
Find out what the National Association of Realtor’s Chief Economist Lawrence Yun says about whether or not a new price bubble is emerging in this video. Meantime, while the interest rates remain low, now is the perfect time to purchase a property in Napa Valley or Sonoma. Please contact me at 707-738-4820 or email [email protected]. I am happy to share my insider information on quiet offerings of wineries, vineyards, estates, new construction and homes here, as well as the extraordinary properties that are not available on the open market.