Thursday, May 30, 2013

The Shortest Housing Boom

Just about everyone has heard of the Case-Shiller Home Price Indices, a leading series of monthly calculations of the changes in the value of homes in the United States.  This key index was created by Robert Shiller, an economist at Yale and Karl Case an economist at Wellesley College. 

Recently, the Case Shiller index has shown that house prices in both the 10- city and the 20-city composite indices have just seen their biggest annual increase since the housing market collapsed in 2006 as shown on this graph:

These recent price increases have some of the bobbing heads on the 24 hour business/news providers practically apoplectic.  Some metro areas are now showing what could be termed rather frothy rises; Phoenix saw a year-over-year positive return of 22.5 percent, San Francisco saw an increase of 22.2 percent, Las Vegas saw an increase of 20.6 percent, Atlanta saw an increase of 19.1 percent and Detroit saw an increase of 18.5 percent.  Las Vegas saw a month-to-month increase of 1.4 percent, a rather significant jump.  Keep in mind that these cities were terribly hard-hit during the decline, however, there is really no particular economic reason why their prices have rebounded as they have.  This certainly has the appearance of a mini-bubble, doesn't it?

A recent interview of Robert Shiller on Yahoo Finance gives us a bit of insight on the main reason that the housing market in the United States appears to be on the rise again.  Dr. Shiller notes the impact of the Federal Reserve on what could be yet another market bubble.  The fact that the Fed is buying $40 billion worth of mortgage securities each and every month has impacted the mortgage market like this:

According to Freddie Mac's weekly data release, 30 year fixed mortgage rates are very, very close to 40 year lows, hitting a low of 3.35 percent in October 2012.  To put this into perspective, these rates were between 6.5 and 6.75 percent just prior to the housing market implosion in 2006 and hit a peak of 14.67 percent in mid-1984.  Over the period between 2000 and 2012, the average fixed 30 year rate was 5.82 percent, nearly 2.5 percentage points above today's rates.  Obviously, once the Fed removes itself from the market and puts an end to QE3, all bets are off.  Mortgage rates are likely to rise and homebuyers and owners will find themselves once again living in the real world.

What is particularly scary is Dr. Shiller's prediction that housing prices could well be the same in ten years as they are today.  Today's housing price boom which has been driven largely by purchasers buying properties to rent, could well be the shortest on record, particularly as more households are forming in rental homes rather than in purchased properties.  As well, with the echo boomers finding job prospects lacking, the ability of the next generation to afford all of those 3 bedroom, two and a half bathroom suburban homes has been severely compromised.

Looking at historical house price data collected by Dr. Shiller back to 1890 and corrected for inflation, it looks like we are just returning to the mean housing price after the deflation of a massive bubble:

In closing, a fascinating schematic showing the buildup of an asset bubble by Dr. Jean-Paul Rodrigue at Hofstra University gives us a really good look at the mindset of the house-buying public during the development of the housing market bubble and shows us that, as I noted above, we are likely just returning to the mean:

Doesn't that one graphic say it all?  Unfortunately, lessons from the past are sometimes very slow to be learned and in the case of the American housing market, the data suggests that we may now be overshooting the target.


  1. I find that I'm in agreement with much of this article. When you ask if housing has bottomed out and moving up, my answer would have to be, I don't know, and either do they. However I can state several things without reservation. Calling the home buying we have seen in both the new and existing markets "pent up demand" is a stretch, many houses still remain empty or under leased. This time around I would like to see those writing the loans forced to have more skin in the game if things go bad. More on the subject of the housing market in my post below,

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  3. Phoenix property management? Give me a break. Enjoy the spoils now, brokers...even the rising Phoenix must return to earth...again

  4. The VULTURES strike again to fool everyone! How can we have a genuine housing recovery if a major part of the housing purchases is in cash? Who has all that cash to buy a house? I have read that 50 to 80% of home purchases is by cash buyers. I don't think the average middle class person can purchase a house for cash. In areas such as South Florida, there is a bidding war for most homes under $300,000. This means institutional investors and rich foreigners are buying the houses for speculative reasons at whatever price they feel. It does not matter what the appraised value is as there is no bank financing. Some of these houses sit empty while the owners wait for the price to rise then sell them and make a huge profit. The banks are also playing games with the foreclosed homes as they keep them vacant until prices rise and sell for a huge profit. The banks list houses and withdraw listings even though they have accepted offers for the house. Bank of America and Wells Fargo are two banks that would rather foreclose on homes than offer modifications. I know because I applied for a modification in January from Bank of America and is still being told that it is in review and still being asked for documents I have already submitted. In February, even before they review for modification, they had a realtor call me to say The Bank has approved a short sale when I did not request or want a short sale. These banks just want to steal people's property and use them for speculative purposes. The Fed is still giving the banks huge amounts of cheap money to lend to their rich investor cronies to purchase houses the banks have robbed people of. The average American cannot get a loan and cannot get a house to buy at a reasonable price nor can they get a modification. UNEMPLOYMENT IS STILL VERY HIGH DESPITE THE BOGUS STATS YOU HEAR. PEOPLE ARE STILL UNEMPLOYED AFTER 4 YEARS. CAN'T EVEN GET A JOB AT PUBLIX OR HOME DEPOT. THIS IS NOT A RECOVERY. IT IS ANOTHER BUBBLE AND IT IS GETTING WORST.

  5. anonymous original pretty much nailed it!!!!

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