Higher Interest Rates Could Burst America’s Housing Bubble

America’s real estate market is headed for turbulent times this year, as the Federal Reserve prepares to tackle out-of-control inflation as early as March.

According to senior economist at the American Enterprise Institute and former IMF deputy director Desmond Lachman, the US housing bubble could burst this year if the Fed begins raising interest rates come March. With the federal government buying up a significant amount of bonds all throughout last year, the resulting equity price bubble has led to “equity valuations at levels only seen once before in the last hundred years.”

As such, once adjusted for inflation, real estate prices are sitting at the highest in 15 years, before the last housing collapse. “Those bubbles in the equity and the housing markets, they’ve been premised on the assumption that interest rates would stay low forever. So, as soon as the Fed starts raising interest rates in an aggressive way, there’s the real risk that it bursts the asset price bubbles and that could, then, move us into a recession,” Lachman warned.

The last time the US underwent a major housing market crash was in 2008, during which the economy succumbed to the Great Recession. The bursting of the housing bubble and subsequent stock market collapse were the result of extraordinary growth across the subprime mortgage market, as mortgage loans were made available to Americans with subpar credit scores.

Information for this briefing was found via Nikkei Asia. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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