Number: RL31918
Title: U.S. Housing Prices: Is There a Bubble?
Authors: Marc Labonte, Government and Finance Division 
Abstract: If housing prices were being driven by a bubble, there is a chance that they could suddenly collapse, with adverse effects on the U.S. economy. Residential investment, which rose 9% annually in 2003-2005, fell by 9.8% in 2006:2. It remains to be seen if this decline is the beginning of a broader trend. A decline in housing wealth could also depress consumption, thereby depressing aggregate spending in the short run. A sudden collapse in housing prices could also affect the health of the financial sector if financial institutions are not adequately safeguarded. All of these possibilities give Congress a cause for concern, yet effective policy responses to a bubble are difficult. If house prices were to decline in some regions, it would not be the first time this occurred. The report examines previous price declines in California, New England, and Texas. Encouragingly, those declines were much smaller than the prior increase in prices.
Pages: 37
Date: September 7, 2006