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.
Not coincidentally, those markets are the ones where prices fell furthest. You also have to remember that some land-constrained individual markets are prone to booms and busts and probably always will be. Take LA. Its house prices crashed 40 percent in real terms from 1990 to 1997, soared 192 percent from 1997 to 2006, and then crashed 48 percent from 2006 to 2012. While individual regional bubbles aren’t fun, they’re not going to threaten the entire financial system like the more-or-less nationwide subprime bubble did between 2007 and 2009.
Now, you could argue that the bubble of the 2000s was so insane that we don’t have to get back to those levels to have another bubble. And that’s true, but there are plenty of other indicators that say we aren’t in one.