Are Home Prices the Next “Bubble”?

[...]In this article, we assess the evidence in support of a bubblein U.S. home prices and discuss whether a severe decline inthese prices is likely. We also examine the effects of a steep dropin home prices on the broader national economy. Examining the possible effects of a severe decline in homeprices is important because of the large role that real estateplays in aggregate household portfolios. According to the Flowof Funds Accounts compiled by the Board of Governors of theFederal Reserve System, households held about $14.6 trillion inreal estate at the end of 2003:3. This figure accounts for about28 percent of households’ assets and is more than 130 percentof GDP. By comparison, households held about $12.8 trillionof corporate equities and mutual funds in 2000:1—the peak ofthe stock market. Furthermore, equity holdings areconcentrated at the upper end of the wealth distribution,whereas housing is the major asset for most households.[...]