A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.

The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.

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“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.

Bair formally served as chairwoman of the Federal Deposit Insurance Corporation and was among the first people to acknowledge the full risk of subprime mortgage loans that helped fuel the housing bubble that preceded the Great Recession.

Bair told CNN that U.S. home prices today are “bubbly” after years of low rates in 2020, 2021 and early 2022.

“When rates were cheaper, a lot of people wanted to buy. You ended up with really frothy price increases. That was pretty predictable,” Bair told CNN.

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A housing bubble can occur when home prices become so high that they detach from demand. For years, as home prices have skyrocketed and affordability issues have sharpened, housing experts and economists have continued to insist today’s housing market is not experiencing the same type of bubble as in the mid-2000s. They’ve also not predicted an earth-shattering crash that led to the global financial crisis in 2007 and 2008.

However, researchers at the Federal Reserve Bank of Dallas warned last year there is “growing concern that U.S. house prices are again becoming unhinged from fundamentals” due to “exuberance” that drove up prices from 2020 until late 2022, when mortgage interest rates were around 3% and 4%.

The low rates, combined with a fear of missing out as prices skyrocketed, spurred Americans into a home buying rush as the COVID-19 pandemic stoked more household creation, opened up remote work opportunities and encouraged more people to seek larger houses at lower price points.

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Even though Bair said home prices need to correct downward, she doesn’t expect that it will happen anytime soon because the U.S. is also experiencing a housing shortage, which has helped keep home prices high even amid today’s high rates, per CNN.

“If supply remains constrained, this could go on for some time,” she told CNN.

Bair doesn’t expect the bubble to burst, but she said “letting that bubble deflate a bit would probably be a good thing.”

“People who already own their home — and I’m one of them — don’t want to hear that,” Bair told CNN. “But for those who want to own, I hope home prices do come down.”

The good news is that Bair said she sees “much less speculation in the housing market today, thank goodness,” compared to the mid-2000s, per CNN. She also noted that even if prices come down, existing homeowners have built up a significant amount of home equity over the past several years alone.

So “even if home prices adjust a bit, people should not be under water,” Bair told CNN.

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