Are we in another housing bubble?

Affordability a key test

Opinion by Robert Romano

Mr. Romano is the senior editor of Americans for Limited Government, publishers of NetRight Daily

According the Case Shiller Home Price Index, home values are up 13.6 percent year over year as of October.

Similarly, the Freddie Mac Home Price Index shows a 10.5 percent gain year over year as of September. In 2013 alone, that index’s average monthly value is 12.27 percent above 2012, higher than even the bubble year of 2005, when it jumped 11.5 percent over 2004.

With three months worth of data still left to compute, 2013 is shaping up to be the biggest year in home value appreciation ever.

So, are we in another housing bubble?

Are homes still affordable?

If the above was all that we knew, we might guess that perhaps we were. However, there are other variables to consider, namely, affordability.

The Freddie Mac Home Price Index in September was listed at 141.47, about where it was in September 2004 at 141.36. But in 2004, household median income was only $44,334, according to data compiled by the U.S. Census Bureau. As of 2012, it stood at $51,017.

Therefore, homes are more affordable now than they were in 2004, with home values roughly the same as they were almost ten years ago. If nothing else, that likely means we’re still in a buyer’s market.

If so, home prices should rally again in 2014, if not at the same high rate of 2013, still at a fairly brisk pace.

When home values outpace wages…

Eventually, however, particularly when unlimited government finance is provided to the market such as it is today, home values may find themselves into a bubble territory just a few years from now, particularly if the growth rate of home prices continues to far outpace the growth rate of wages.

Home value appreciation has outpaced wage growth three times in the past 38 years: 1977 through 1980, 1985 through 1990, and 1999 through 2006.

Each time the growth rate of home prices dipped below that of wages, a recession shortly followed thereafter like clockwork, in 1981, 1991, and 2008.

One reason this may be so is because when wages cannot keep pace with home values, the amount of new borrowers entering the market will eventually decrease, hurting demand, which in turn will place downward pressure on prices.

Each time the growth rate of home prices dipped below that of wages, a recession shortly followed thereafter like clockwork, in 1981, 1991, and 2008

This runs counter to analyses that have in the past suggested that slightly higher interest rates in the mid-2000s somehow took the air out of the housing bubble. Instead, the issue seems to have been one of sheer affordability.

Now, we still do not know what wages did in 2013 — that data won’t be released until September — but it likely stands to reason that it will not grow above 12.27 percent based on the sheer fact that it never has.

Meaning, we have most certainly entered another housing boom.

A boom, but for how long?

So, how long will it last? The last three times home values outpaced wage growth, the periods lasted four years, six years, and eight years, or an average of six years.

Much depends on 2014. A forward-looking piece by USA Today predicts that the housing market should cool considerably this year. Economist John Burns predicts a 6 percent gain in 2014. Zillow on the other hand only sees a 3 percent increase. Either way, that will be way off the boom of 2013.

One factor that could make prospective forecasts a bit unpredictable is current credit market conditions. A $58 trillion market consisting of all debts public and private, it has usually grown at a robust average of 8.5 percent throughout the postwar period.

Yet, since the financial crisis it has been subdued due to lack of demand by consumers to take on more debt, only growing 3.47 percent in 2012.

And so far, through the first three quarters of 2013, it is only growing at a 2.74 percent rate annualized — meaning credit is actually slowing down. It remains to be seen if home prices be sustained without so many new buyers taking out mortgages.

It is therefore hard to predict where in the credit cycle we may be. With $2.4 trillion of excess bank reserves, the financial sector continuing to clean up its books from the last housing crash, and the Federal Reserve plus a Mel Watt-led Federal Housing Finance Administration looking to keep the spigots on, credit creation may yet pick up again in 2014, leading to further spikes in home values.

The brisk 6 percent economist John Burns forecasts for 2014 could mean the home buying market is still healthy and has room to grow.

Which, since houses today are still more affordable than they were in 2004 with wages being 15 percent higher and yet home prices the same as they were then, the current cycle could have a lot more boom in it before it goes bust again.


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