Are residential home prices and commercial real estate values in a bubble?

by confoundedinterest17

Are residential home prices and commercial real estate values in a bubble? Jesse Colombo has an interesting article in Forbes on “Why The U.S. Commercial Real Estate Bubble Is About To Burst.” I am arguing that there was a bubble in national residential home market, but not so much anymore.

A former chief economist at Freddie Mac once argued that a house price bubble occurs when average house price growth rises above average wage or earnings growth. Such as the easy-credit bubble starting in February 1998 that ended in August 2006. The NEW housing bubble began in March 2012 and “ended” in April 2020 when home price growth was approximately equal to wage (earnings) growth.

As an example of localized housing bubbles, you can see that home price bubble peaked in 2006, crashed and started rising again in 2012 as median family income started rising proportionally to home price growth (unlike 2004-2008).

For commercial real estate, according to the RCA CPPI index, commercial real estate values have doubled since Q1 2011 as The Federal Reserve has really expanded their balance sheet purchases and hammered down their target rate. Residential housing prices are up 63% since Q1 2011. Hammer time!

Not surprisingly, Green Street’s all-property index is down 10% below pre-Covid levels.

With declining commercial real prices (due to Covid-related economic shutdowns), and the faster Covid shutdowns go away, the sooner we will know the long-run effects on unemployment and real estate demand.

CMBX 6, the reference index for CMBS deals primarily for retail and office, is declined from 95 before Covid to 67 after Covid, a huge loss.

Let’s hope markets don’t keep going down.