The top story in all the major papers on Wednesday was news that home prices jumped 11 percent in the first quarter from a year ago, further confirmation that the housing recovery is underway in earnest.
The double-digit home-price increases and return of bidding wars have led to an awful lot of “bubble” talk lately.
Gawker declared yesterday that “The Next Housing Bubble Is About To Pop All Over You.” Gawker doesn’t quite grasp that soaring prices in Silicon Valley and San Francisco are being driven by a flood of newly minted tech millionaires chasing after a constrained supply of higher-end homes, and that’s not a bubble. Bay Area transactions are still 16 percent below average levels over the last 25 years and half the level seen at the peak in the mid-2000s. Prices would have to skyrocket, as we’ll see below, to get back to peak levels.
Yahoo Finance also declared last week that “The Housing Market Gets Bubbly Again” in a confused piece largely based on one anecdote involving the author, who buries a second anecdote that contradicts his thesis.
Bloomberg headlined a story two weeks ago, “From Brooklyn to California, Housing Bubble Threat Grows.”
Bloomberg’s first anecdotal evidence of the bubble threat? “An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers.”
A five-bedroom brownstone in Brooklyn for under a million bucks—and it only drew 50 offers?
Its second anecdote is about an all-cash deal for a $2 million house in Menlo Park, aka Facebook headquarters.
Its third anecdote is no more impressive:
In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.
Does 3,300 sound like a lot of condos to you? In 2005, there were 50,000 condos in the pipeline in downtown Miami alone.
The BBC throws in with a terrible package on “Concerns over potential housing bubble in the US” in which the reporter explains bubble economics with this head-slapper:
The worry is: If prices are rising too high too fast, people will drop out of the market altogether, creating a bubble.
I know screaming “housing bubble” draws clicks and viewers, but no, we are not in another housing bubble.
First, prices, as measured by Case-Shiller, are still down 27 percent from their peak seven years ago. But Case-Shiller calculates nominal prices, not real ones. And the consumer price index (inflation) is up 15 percent since 2006. So real house prices are about 37 percent below 2006 levels and are just now returning to where they were 13 years ago. Here’s a chart from the excellent Bill McBride of Calculated Risk showing real house prices going back a few decades:
Click here for a CR chart from last year that showed housing prices at about 1979 levels, by Robert Shiller’s measure, anyway.
And here’s a tip for the math-challenged out there: It takes a larger percentage increase to offset a percentage decline. Take a $100,000 house at the peak. If it fell the real national average 42 percent in the bust, it would have been worth $58,000 at the bottom early last year. But to get back to $100,000, it would take a 72 percent increase from the trough.
Even now, after the sharp bump off the bottom, prices would have to jump 60 percent to get back to their bubble-era peak.
It’s not just the national market, either. The bubble stories tend to focus on markets like Los Angeles and San Francisco. But both those markets, for instance, are just now getting back to 2003 and 2000 prices, respectively.
To get back to peak levels, San Francisco’s home prices would have to jump 60 percent, by my calculations (using Case-Shiller data). LA would have to jump 66 percent, Phoenix 99 percent, and Miami 105 percent. Las Vegas’s house prices would have to skyrocket 149 percent to reach record levels.
To really have a housing bubble, you have to have lots and lots of transactions.
Says whom?
#1 Posted by Phil Perspective, CJR on Thu 30 May 2013 at 12:58 PM
It is a bubble. Silly to claim otherwise. All the current inventory value are base on cheap money.
When rates go up prices will decline. How much is the question?
#2 Posted by Robert Arnold, CJR on Thu 30 May 2013 at 03:43 PM
go ahead and buy something if you are INDEED this confident.
buying today is no different than buying an overvalued call option.
you can be right about market direction
and STILL LOSE MONEY.
#3 Posted by OnlytheAPPRAISERknows, CJR on Thu 30 May 2013 at 09:45 PM
In my opinion, we are seeing another panic in consumer behavior. Price are going up and people is getting worry that they will miss the boat if they don’t buy now. We see this behavior always in history, and here history is repeating itself. The true reality is as soon as the Fed put the break and rates go up housing will feel the effect!
#4 Posted by Nelson, CJR on Sat 1 Jun 2013 at 07:30 PM
Ryan, you are completely wrong! You stated "Prices would have to skyrocket, as we’ll see below, to get back to peak levels."
Prices indeed have sky-rocketed in some areas already. I live in the south Bay Area, and prices are now about 15-20% ABOVE bubble-peak era. 2 homes within my residence area just sold about 125K above asking price. These are 1200 sq. ft extremely modest dingy homes that are over 60 years old with zero curb appeal and very small lots but sold close to 1 million dollars. During the peak of the bubble they were selling around 830K and we thought that was excessive and now they are selling for almost a million!
You also stated "Even now, after the sharp bump off the bottom, prices would have to jump 60 percent to get back to their bubble-era peak." I have some news-flash for you, in some areas around the bay area prices have indeed jumped to almost 60% since the bottom and are well above the bubble-era peak. Check out Morgan Hill and Gilroy areas around the bay area. Some of the homes that sold in 2009-2011 are now being re-sold as-is for 40%-60% above their last sale prices.
If this is not a bubble - then I don't know what is?! There's absolutely nothing in the economy, employment, or dollar inflation that would justify any of this, despite low inventory, low rates, etc... it does not add up.
Please do more research before focusing only on a handful of areas to write about which do not represent the reality of where some average Americans live because when I read articles such as yours I cannot help but laugh and this isn't exactly the comics section!
#5 Posted by Anonymous, CJR on Sat 1 Jun 2013 at 08:12 PM
I can bet that every single article such as this one that claims a definitive "this is not another housing bubble" must be written by someone who owns property (maybe a good chunk of it) and is only happy to make such statements because of the obvious personal benefit... And again, all the realtors around the country will give this article a thumbs up... and again for obvious reasons... I have yet to read a reasonable article that has logic and explains what is really going on.
#6 Posted by No Way, CJR on Sat 1 Jun 2013 at 08:30 PM
Ung,
As a Columbia alumni, I find it hard to stomach that this article comes from this institution. Of course it's a bubble. Let's take you to school by listing the ways:
Very few first time buyers - Historically, first time buyers are 40% of market, currently, they are 25% the market.
Too many investors. Historically, investors make up 15% of market. Currently, they make up 35% of market. Sooner or later, someone needs to actually occupy homes. They are not equities or securities.
Unsustainable interest rates. Ryan, I strongly go encourage you to buy and then try to sell at the same price once interest rates go up as little as 1.5%. Current fed policy is making instant underwater owners by crushing any appreciation for the mid-term future. Buy now and cry later.
Too many homes already. We overbuilt so much that even depressed construction levels over the last few years have left a net surplus.
Artificially low inventory levels due to investors, underwater owners unable to sell and litigation over foreclosures. This, plus the low interest rates, will lead to a mid term building boom that will worsen the net surplus of homes.
Baby boomers will have to trade down. They don't have enough saved. This will start in 2015.
And there are many, many, many other reasons. The first housing bubble didn't fully unwind. There is no reason for prices to go up naturally. The cratering of the prices was the "recovery" as it brought about desparately needed correction. Peopple forget that.
#7 Posted by AK, CJR on Sat 1 Jun 2013 at 08:35 PM
Get while the gettin' is good because there's a massive housing price correction ahead of us and it's not going to be pleasant for those who bought a house in the last 13 years.
#8 Posted by Realtor, CJR on Sun 2 Jun 2013 at 12:41 AM
Ryan,
Why aren't you CJR folks so cocksure on your foreign-policy opinions as you are on domestic ones?
Besides, don't you think the two are linked, what with the domestic impact of a trillion-plus dollars annually wasted overseas?
So, yeah, it would only be consistent for CJR to similarly review foreign-policy journalism on a regular basis.
What say you?
#9 Posted by Dan A., CJR on Mon 3 Jun 2013 at 01:02 PM
I dont see how this is not a bubble. If home values were in a bubble during the bubble that popped in 2006, and values are climbing back to those heights, how could it not be?
I have been keeping an eye on the Port St Lucie area and prices are near their highs before the collapse. Add that to the shadow, and sub-shadow inventory?
Dont kid yourself. Its a bubble. As soon as the investment companies that are the purchasers of all this real estate have pumped up values enough, they will dump the properties en mass, devaluing it for the homeowner and reaping the rewards for themselves.
#10 Posted by Eric, CJR on Wed 26 Jun 2013 at 03:46 PM