When people tick off the components of the “everything bubble” they usually omit US housing, for a couple of reasons. First, bubbles don’t normally recur immediately in the same asset class, because memories of past carnage need to fade before investors can be seduced back into irrational optimism. Since housing was the epicenter of the last boom/bust cycle, no one is looking there for evidence of new bubbles.
Second, the action in housing has been more gradual than in the 2000s, so it hasn’t generated a lot of breathless headlines about speculators making killings with other people’s money.
But this expansion has gone on for such a long time that even modest annual price gains have taken home prices back into bubble territory. And now the news is starting to reflect it. From today’s DollarCollapse.com “Real Estate” links list:
Southern Cal home prices surge 5.6% to record $549,000 in November
Oakland home values surge 261 percent in 20 years
Broward real estate leads rebound in decade after downturn
San Diego median home price hits all-time high of $594k
Phoenix home prices still outpacing wage growth
Dallas-Fort Worth median home prices unaffordable for average wage earners
An average worker can’t afford a median-priced home in the Denver metro
Median home prices are still unaffordable in majority of U.S.
Blue-state voters feel harshest squeeze from soaring home prices
Millennials have no place to turn? Rising home prices
Housing shortage hits new record low, igniting prices
To recap, home prices are above their 2007 bubble peaks in many places while the wages of potential homebuyers have barely risen, which is squeezing ever-larger numbers of people out of the market. Yet somehow the buying continues. This may not qualify as a mania, but it’s definitely looking dysfunctional, because where can a sector go from “record low affordability” if it wants to keep rising?
Going forward, one of two things has to happen. Either buyers go on strike, as they (and their mortgage lenders) recognize that houses are a bad deal at current prices and mortgages written at those prices are unlikely to be paid off. Or the government tries to keep the party going by lowering interest rates to make future mortgages easier to manage.
Since a dramatic slowdown in the housing market would take the rest of nominal GDP down with it, that will of course be seen as unacceptable, leading calls for lower rates, a weaker dollar and various other kinds of stimulus like tax cuts paid for with bigger deficits.
Put another way, even if housing doesn’t crash, the need to keep prices elevated is one more impetus for what looks like a tidal wave of monetary ease coming our way.