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Joy Zhang

Joy Zhang

Executive Director, MSCI Research

David Zhang

David Zhang

Managing Director and Head of Securitized Products Research

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Housing-Bubble Déjà Vu

  • The recent string of historically higher national house-price appreciation rates raised the specter of another housing bubble for some investors.
  • Potential tapering of the Federal Reserve’s quantitative easing may push up mortgage rates, and moderate further price appreciation; on the other hand, potential expansion of mortgage credit may extend it.
  • Investors in mortgage-backed securities may wish to differentiate short- and long-term house-price trajectories to gauge their exposure to mortgage credit risk.

On July 27, the Federal Housing Finance Agency (FHFA) reported eye-popping year-on-year national house-price growth of 18% — the highest national house-price appreciation (HPA) in recent decades.1 The streak of strong housing-market performance since the onset of the COVID-19 pandemic is even sharper than it was on June 9, 2005, when former Federal Reserve (Fed) Chairman Alan Greenspan told Congress he saw “froth” in the U.S. housing market. Two years after his testimony, HPA turned negative, followed by the 2008 house-price crash and global financial crisis.2

Does the recent run-up in home prices represent housing-bubble déjà vu? And what can investors in mortgage-backed securities (MBS) do to assess their mortgage credit risk?


House Prices’ Highest Growth Rate in Decades

Year-on-year growth rate of purchase-only national house-price index. Source: Federal Housing Finance Agency.

The current record-setting HPA stands apart from 2005, as it came during a severe economic recession brought on by the pandemic. There are similarities, however, including the fact that house-price growth has rapidly exceeded household income growth, as shown in the exhibit below. As a result, even with much lower mortgage rates than we saw in the 2000s, housing affordability has rapidly decreased to early 2000s levels.


Home Prices Grew Faster than Household Income Since March 2020

U.S. national house-price index (FHFA purchase-only) and household income. Year-2000 levels are benchmarked as 100. Source: FHFA, FRED, Federal Reserve Bank of St. Louis.

Our previous research on house-price dynamics showed that the HPAs were “positively serial correlated in the short term, while negatively serial correlated in the longer term.”While the current high HPAs indicate good short-term performance for the housing market, they do indicate higher risk for the medium term, as the example of the 2008 crash shows that house prices cannot outrun income growth in the long run. Most U.S. mortgages amortize over long periods, and have long-term credit-risk exposures. MBS investors may want to pay attention to the overheating housing market, especially for newer mortgages, which will be most sensitive to any house-price downturns.

The Fed, no doubt, had this on their mind during the recent monetary-policy debate. Several Fed governors have proposed curtailing MBS purchases as the first step in tapering quantitative easing.4 Low mortgage rates have been a key driver for higher HPA. For example, during the four years between 2011 and 2014, the Fed’s monetary policy drove 30-year mortgage rates from about 4.8% to 3.8%. The cumulative national HPA for this period was 19%, with about 4.5% attributed to lower mortgage rates, according to our research estimation.5


US Mortgage Rates at Historic Lows

Source: FRED, Federal Reserve Bank of St. Louis.


Giving Credit Its Due

Another important policy factor for house prices is the availability of consumer and mortgage credit. The current housing market does have an important distinction from the 2005-2007 house-price bubble. Namely, we haven’t seen dramatic expansion of consumer over-leverage, measured as percentage of consumer debt and mortgage debt as percentage of the GDP. (See the exhibit below.) By comparison, during the four-year period from 2003 to 2007, household debt increased from about 80% to 100% of nominal GDP. This debt expansion contributed to about 6.3% of house-price expansion, according to our research estimation.6


US Household Debt Far Below Levels Seen Before the Last Housing Crisis

Source: FRED, Federal Reserve Bank of St. Louis.

There is some anecdotal evidence, however, of a gradual expansion in mortgage credit, as some originators have started offering zero-down-payment mortgages.7 In addition, the federal government, including the FHFA, is looking into policy levers to address various homeownership issues.8 These types of practices and measures have historically served to push short-term house prices higher, especially at lower house-price tiers, with uncertain long-term effects.

With the uncertainties in macroeconomic policies, as well as a potential expansion of mortgage credit, MBS investors may find it useful to differentiate between short-term and long-term house-price trajectory for their exposure of mortgage credit risk.



1“FHFA House Price Index Up 1.7 Percent in May; Up 18.0 Percent from Last Year.” Federal Housing Finance Agency, July 27, 2021.

2“The economic outlook.” Testimony of Chairman Alan Greenspan Before the Joint Economic Committee, U.S. Congress, June 9, 2005.

Zhang, Jiawei, Yu, Yihai, and Zhang, Joy. 2020. “US House Price Projections from the Economic Impact of the Coronavirus.” Journal of Structured Finance 26: 52-62.

4“Right now the housing markets are on fire; they don't need any other unnecessary support,” Federal Reserve Board Gov. Christopher Waller told Bloomberg TV on June 29.

Zhang, Jiawei, et al. “US House Price Projections from the Economic Impact of the Coronavirus.”


7“Non-agency lender Athas resurrects crisis-era 100% mortgage financing with two loans, ‘80/20’ package.” Debtwire ABS, June 29, 2021.

8“Prepared Remarks of Sandra L. Thompson, Acting Director, FHFA, at FHFA Virtual Listening Session: ‘Closing the Gap to Sustainable Homeownership.’”, July 1, 2021.



Further Reading

US House Price Projections from the Economic Impact of the Coronavirus

Managing Against MBS Indexes: A Duration Perspective

What Can Loan-Level Data Reveal About US Auto-Loan ABS?

Securitized Products’ LIBOR Transition Picking Up Pace