Friday, April 09, 2021

Is there a New Housing Bubble?

by Calculated Risk on 4/09/2021 11:36:00 AM

There is discussion of another housing bubble.  I wouldn't call the current situation a "bubble".

Way back in early 2005, I wrote: Housing: Speculation is the Key
A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation ... Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts.
Maybe prices are too high based on fundamentals (due to extremely low supply and record low mortgage rates), but there is very little evidence of speculation (not like the loose lending of the housing bubble).

Ben Carlson discusses lending (and other issues) in Why This is Not Another Housing Bubble.

The lack of wild speculation doesn't mean house prices can't decline, but it means that we won't see cascading declines in prices like what happened when the housing bubble burst.  In the 2006 through 2011 period, as prices fell, and teaser rates and other "affordability products" expired - more and more homeowners were forced to sell (or just walk away).   That drove prices down 26% nationally from peak to trough, and much more in certain "bubble" cities like Las Vegas (down 62% from peak) and Phoenix (down 56%).

We might see some price declines, especially in some 2nd home areas that saw a surge in demand at the onset of the pandemic, but the recent buyers are all well qualified, and some price declines will not lead to forced selling.   So there is no threat to the financial system with widespread defaults.

On fundamentals: 

Every month, I post a price-to-rent graph based on 2004 paper by Fed economist John Krainer and researcher Chishen Wei: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National and Composite 20 House Price Indexes.

This graph shows the price to rent ratio (January 2000 = 1.0). This suggested prices were way too high during the housing bubble, and also suggests prices might be high now - but only about half the housing bubble.

If we factor in low rates, demographics, and if low supply persists (I think inventory will increase this year), maybe prices are only a little out of line.

Here is another measure - house prices to the Median Household income.

House Prices and Median Household IncomeThis graph uses the year end Case-Shiller house price index - and the nominal median household income through 2019 (from the Census Bureau).  2020 median income is estimated at a 5% gain.

This graph shows the ratio of house price indexes divided by the Median Household Income through 2020 (the HPI is first multiplied by 1000).

This uses the year end National Case-Shiller index since 1976 (December 2020 estimated).

House price appear elevated relative to incomes, but still well below the levels of the housing bubble.

From a historical perspective, house prices are high.  But lending standards have been solid, and we haven't seen significant speculation - so I wouldn't call this a bubble.