FacebookTwitterGoogle+RedditEmail

Return of the Housing Bubble?

by DEAN BAKER

Recent data showing house prices rising at their fastest rate since the collapse of the bubble have many people asking whether we are seeing another bubble. That is a good question.

At the national level the answer would almost certainly be no. Different indexes show slightly different stories, but inflation adjusted house prices nationwide are still down by roughly a third from their bubble peaks. This means that house prices may be slightly above their long-term trend level, but close enough that no one could say they are out of line with the fundamentals of the housing market. That doesn’t mean that there can’t be a dip, but there is no reason to expect another plunge like the 2007-2009 collapse that threw us into recession.

While house prices nationally may not be out of line with fundamentals, there are serious grounds for concern in many local markets. House prices have been rising at an extraordinary pace in many markets and may soon be hitting levels that are clearly unsustainable.

The fastest rate of price increases can be found in many of the former bubble markets. Cities like Phoenix, Arizona and Las Vegas, Nevada are seeing very rapid rates of price increase, as are many of the cities of central valley in California. Prices in many of these cities have risen by more than 20 percent over the last year.

Furthermore the most rapid price increases are occurring at the lower end of the market. In Las Vegas the price of homes in the bottom third of the market have risen by more than 40 percent over the last year. In the last three months they have increased at almost a 70 percent annual rate.

There is a similar story in Phoenix where prices for homes in the bottom third of the market rose by just under 40 percent over the last year and have risen at just under a 50 percent annual rate over the last three months. Many neighborhoods in cities like Modesto or Vallejo are experiencing the same sort of run-ups in price.

These markets were all badly beaten up in the crash with prices falling back to levels not seen since the mid-90s. As a result, current prices in these markets are not obviously out of line with fundamentals.

However the concern is if these rates of increase continue. If a market is properly priced today, but follows the same path as the bottom tier of the Phoenix market and rises 50 percent over the next year, then it will be seriously over-valued in another year. Even worse, if one of these markets were to sustain the 70 percent rate of increase recently seen in the bottom tier of the Las Vegas market over the next year, then we could be looking at a market that is 70 percent over-valued.

Investors are driving prices in the markets seeing the rapid run-ups. In many cases, hedge funds and private equity investors are buying up large blocks of houses. Some may plan to rent them out for a period of time, but most undoubtedly expect to flip them for substantial profits in the near future. Similarly, many smaller investors are buying up homes, doing minor repairs, and then looking to resell them for a substantial profit a few months later, just as they did in the bubble days.

The problem with these investor purchased homes is that the process only makes sense as long as prices continue to rise. There are no great windfalls for people buying homes and flipping them in a stagnant housing market.

If the hedge funds and flippers end up taking a hit when the music stops no one could be too upset. Presumably they understood the risks when they got into the market.

The real problem is that many ordinary homeowners may get caught in the middle just as they did in the last bubble. If these markets go into bubble territory and then prices fall back by 20-30 percent new homebuyers will have seen their equity disappear and find themselves underwater, just as happened in 2008-2010.

While people have to make up their own minds on whether homeownership makes sense for them, it would be good if the government and non-profit sector made the push against homeownership this time if these markets go back into bubble territory. There are many advantages to homeownership, but that’s not the case when it comes to buying a home in a bubble market. No one builds assets by paying 30 percent too much for a house.

Many low and moderate income people saw their dreams destroyed when the last bubble collapsed. It would be too cruel to see the same mistake repeated just a few years later.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on The Exchange.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Ralph Nader
Trump and His Betraying Makeover
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
Julian Vigo
The Hijos of Buenos Aires:  When Identity is Political
Subcomandante Insurgente Galeano
By Way of Prologue: On How We Arrived at the Watchtower and What We Saw from There
Dave Lindorff
Is Trump’s Idea To Fix the ‘Rigged System’ by Appointing Crooks Who’ve Played It?
Aidan O'Brien
Fidel and Spain: A Tale of Right and Wrong
Carol Dansereau
Stop Groveling! How to Thwart Trump and Save the World
Kim Nicolini
Moonlight, The Movie
Evan Jones
Behind GE’s Takeover of Alstom Energy
James A Haught
White Evangelicals are Fading, Powerful, Baffling
Barbara Moroncini
Protests and Their Others
Joseph Natoli
The Winds at Their Backs
Cesar Chelala
Poverty is Not Only an Ignored Word
David Swanson
75 Years of Pearl Harbor Lies
Alex Jensen
The Great Deceleration
Nyla Ali Khan
When Faith is the Legacy of One’s Upbringing
Gilbert Mercier
Trump Win: Paradigm Shift or Status Quo?
Stephen Martin
From ‘Too Big to Fail’ to ‘Too Big to Lie’: the End Game of Corporatist Globalization.
Charles R. Larson
Review: Emma Jane Kirby’s “The Optician of Lampedusa”
David Yearsley
Haydn Seek With Hsu
FacebookTwitterGoogle+RedditEmail