Is the housing bubble back? Answer: Yes

by Rob Regan on March 22, 2013

I’ve been saying it feels like 2004 all over again, and that it feels like we’re reigniting the housing bubble.  While that’s just been my gut feel based on past experience in the previous bubble, I just found this article on “Political Calculations” blog that asks, analyzes and answers the question “Is the housing bubble back?”

To determine a housing bubble from normal home price appreciation they compare prices to incomes.  When home prices deviate from income, they look deeper to see if there is something causing a temporary blip, or if there is a sustained trend from the norm.  I can’t do the analysis justice here, so head on over to Political Calculations for the full article.  It is a very worthwhile read.

They conclude that yes, we are in a bubble that began in the middle of 2012 or about the time when it became abundantly clear here in San Francisco that comps had little meaning.

So if we’re in a bubble, the next questions are 1) how long can it continue, and 2) how much higher can real estate prices go which should help you decide 3) should you buy, sell or wait.  And the article ends with their own question “why?” and promises to answer it on their next installment.  I think that answer is easy.  Interest rates are so low that buyers can afford loans that are 1/3 larger than what they could afford in 2008 when prices came crashing down.   That leaves a lot of price appreciation room, and quite a lot of time too.  We should be able to identify a peak when affordability matches the last peak… that would require some combination of higher interest rates, and higher prices.  Since the Fed has stated they plan to keep rates down for another 1 to 2 or 3 years, we just might catch up entirely with price appreciation.

Unfortunately if we are in a bubble, it will end.  And it will presumably end when the Fed is forced to raise interest rates, which they plan to do only when the economy is better.  Quite the catch 22 don’t you think?  A house price boom that ends with a better economy, but when the bubble bursts it hurts the economy.

So what should you do?  Consider your long term goals, and keep your eye on affordability of the market at large.

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