For instance, is it better to rent or to buy? It’s still better to buy, according to S&P Indices calculations:
The essential question regarding any bubble is: Does the investment make sense? Can homebuyers actually afford their mortgages?
Here’s a WSJ chart showing how historically cheap houses are (this goes through the third quarter of last year)
Homeowners are spending a historically low amount of their income on their mortgages—just 13 percent, according to Zillow. From 1985 to 1999, that number was 20 percent. In the bubble it was nearly twice what it is now. In 1979 it approached three times today’s levels.
You also have to ask about lending standards. Nobody cares if rich people are buying $2 million houses with cash. There are only so many of them, and if they lose their shirts, it affects them and, maybe, the help. The systemic problems come when banks lend to people who can’t afford to pay them back. Even Bloomberg’s bubble-threat story notes in its too-be-sure paragraph that “in contrast to the easy lending of the boom years, mortgage standards are strict.”
For instance, the average borrower closing a house in March had a 743 FICO score, according to Ellie Mae. The average denied applicant had a 702 score, just four points lower than the average approved applicant in 2007.
The Cassandras say the Fed is blowing bubbles with its easy-money policy. But the whole point of quantitative easing and extremely low interest rates is to fight the massive deflationary bias caused by trillions of dollars of bad debt incurred during the bubble. The economy can’t get back on its feet until housing starts really moving again. Low interest rates make it possible for buyers to afford higher prices. As interest rates start to rise in the next year or two, that will counterbalance the surge in prices, as will an increase in inventory, as underwater homeowners are able to sell their houses without losing money.
To really have a housing bubble, you have to have lots and lots of transactions. And while sales are up (remember, that’s a good thing!) they’re still at 1999 levels, even though we have 10 percent more households since then. Transactions of new and existing homes would have to pop 55 percent to reach peak bubble levels—roughly 3 million more deals a year.
That’s not happening anytime soon.
Bear markets don’t last forever, and not every recovery is a bubble.
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