Home prices are a lot like input price gauges these days — just as you don’t need to look at the latest prices paid subindex on whatever PMI is making the rounds to know that price pressures are building, you scarcely need confirmation that the US housing market is on fire.
And yet, I suppose you could argue there is one advantage to documenting each successive scorching print — namely, you’ll have something to point to in hindsight when the bubble bursts. “That was the top,” you can declare. “I remember it well.”
With that in mind, the latest read on the S&P CoreLogic Case-Shiller index shows home prices rose another 12% in February YoY. It marked another “largest rise since 2006,” moment (figure below).
It’s the same story over and over again, I’m afraid. I’m compelled to repeat myself, verbatim, Phil Connors style.
Pandemic dynamics triggered a flight to the suburbs and record-low mortgage rates helped accelerate the process. The durability of work-from-home arrangements and the possibility that some companies will make those arrangements semi-permanent nudged more buyers into the market. (“Once again the eyes of the nation have turned here to this — tiny, village, in, western, Pennsylvania, blah, ba-blah, ba-blah.”)
By the end of 2020, housing was arguably in a new bubble. And you know what? I’ll just drop the euphemisms. It’s a bubble. US housing is a bubble. All signs suggest it’s a bubble. Even if, like me, you’re inclined to have semi-philosophical semantic debates about whether we can truly ascribe a word like “bubble” with any degree of accuracy to market phenomena, sometimes, it’s just a bubble.
A quick check on mortgage rates shows they’re back on the decline (figure below) after the Q1 bond selloff pushed up borrowing costs from record lows.
When taken in conjunction with the latest new home sales data which included the highest backlogs in 15 years, you’re left with little choice but to acknowledge the froth.
Amusingly, older homes are now more expensive than new ones. “The premium for newly built homes vanished last month as low supply fueled price increases in the broader market and erased the discount traditionally associated with older properties,” Bloomberg’s Jordan Yadoo wrote Monday, adding that “the median sales price of a previously owned single-family home rose to $334,500 in March [while] new properties sold for a median $330,800, marking a reversal in the differential for the first time since June 2005.”
The commentary around quadrupling lumber prices (which have added almost $25,000 to the price of new homes, on average) invariably comes across as humorous by accident. “If you only need three or four two-by-fours, it’s probably not going to hurt too much,” one person said, while musing about wood to Bloomberg for a separate article published this month. “However if you’re finishing a basement or putting on a deck, the current price is going to be quite inflated.”
That’s “analysis” apparently. When something quadruples in price, it’s better to not need it at all. But, if you do need it, your level of irritation will rise commensurate with how much you need. I missed my calling. I should have been a wood analyst.
I didn’t check, but I’m reasonably sure that the usual cacophony of Fed blame-casting was rampant Tuesday when the latest Case-Shiller figures were released. That kind of criticism isn’t without merit. But just as the Fed isn’t “trying” to starve people in developing economies (more here), they aren’t super-excited about inflating a potentially dangerous property bubble either.
For some reason, this is one of the most difficult concepts for would-be Fed critics to grasp, let alone accept. Think about your own life. Sometimes, you do things you know are likely to result in deleterious side effects because you judge that the benefits outweigh the risks at that particular time. Try as you might, you often end up wrong. The risks outweighed the benefits. You just didn’t know it ahead of time.
The better, simpler argument, is this: The Fed has more than enough experience to know that these policies are conducive to larger and larger episodes of speculative excess. If it is, in fact, necessary to enact the policies irrespective of those risks due to a serious emergency, then policymakers should openly acknowledge that bubbles are not just possible, but likely already forming. As such, they’ll be addressed, in an effort to reduce moral hazard while preserving stimulus where it’s necessary.
The problem with that idealistic (read: unrealistic) argument is that the Fed’s tools aren’t really conducive to it. When they’ve tried to pull off that balancing act previously, the same critics invariably charge that policymakers are “driving with one foot on the brake and one foot on the gas.”
Maybe it’s just better to drive blindfolded, with no brakes, feet (instead of hands) on the wheel and a heavy brick on the accelerator.
I meant for that to be a jab at Fed critics. But after I wrote it, I realized they’d say: “That’s precisely what the Fed has been doing for the past several decades.”