Housing Market Dynamics Shift Amid Economic Uncertainty

America appears to be at the top of its second house price bubble of the first quarter of the 21st century. House prices are now 77 percent above their 2007 peak in the housing bubble of the early 2000s, according to the S&P CoreLogic Case-Shiller National House Price Index.

This inflation of American house prices was stoked by the unprecedented buying of mortgages by the Federal Reserve. The Fed purchased mortgage assets for the first time in its history in 2008, as an emergency intervention while the first bubble was collapsing.

The Fed assured Congress that such buying would be temporary and would not affect the longer-run size of its balance sheet. Instead, the Fed's mortgage expansion continued until 2022 for 14 years. During this period, it forced 30-year fixed mortgage interest rates to abnormally low levels below 3 percent.

The Fed's mortgage portfolio reached $2.7 trillion, three times as big as it had been in 2007. As of December 2025, the mortgage portfolio is still over $2 trillion, with a mark-to-market loss of $323 billion as of September 30.

The Fed cannot sell its mortgage portfolio without realizing market value losses and pushing mortgage interest rates higher. The current bubble is seen as a housing affordability crisis, as many people, especially young families and first-time buyers, cannot afford houses at the now historically normal mortgage interest rates.

Sean Bobson, the CEO of the Amherst Group, stated that if mortgage lending rates and household income remain at current levels, to reach the affordability of 2019, U.S. house prices would need to fall 35 percent.

The Wall Street Journal stated that the affordability crisis cannot be solved, but the argument can be made that house prices can fall. When the Fed stopped increasing the size of its mortgage portfolio in 2022, U.S. mortgage interest rates rose to historically common levels of 6 to 7 percent.

Observers were surprised that this doubling of interest costs did not cause a sustained decrease in average house prices, though the volume of house purchases shrank to the lowest levels in three decades.

The AEI Housing Center projects that the year-over-year national house price increase will fall to zero in December 2025, and nominal house prices will decline in real terms at a rate of 3 percent. The Housing Policy Council calculated that as of the third quarter of 2025, house prices were 30.8 percent higher than their long-term inflation-adjusted trend.

This situation mirrors the first quarter of 2007 when house prices were 29.5 percent higher than the trend, leading to a total house price decline of 27 percent by 2012. The report suggests that the direction for home prices is likely down, though the exact amount is uncertain.

The repeated housing bubble demonstrates the risks of Federal Reserve independence, with no oversight on its significant mortgage investments leading to losses for the Fed, Treasury, and taxpayers. The report calls for Congress to clarify the oversight of the Federal Reserve, which operates largely independently.