Housing Is A Bubble. No Point In Denying It Now

Housing Is A Bubble. No Point In Denying It Now

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.”


11 thoughts on “Housing Is A Bubble. No Point In Denying It Now

  1. US housing prices look scary – unless you compare them to Canada where the average house price, on a nominal basis, is almost twice as much as in the US.

  2. I live in that town in Pennsylvania, and LOL. Nothing stays on the market for more than a week.

    I tried to buy six 8 foot 1×6 cedar boards to build a raised bed garden. Didn’t care too much about the price, but the order got rescheduled from April 6th to April 30. Figured I would cancel the order and just buy from a different supplier, and no one else had any at less than contractor volumes. C’est la guerre

  3. My wife and I were sure that it was us, not the market. Today houses in south Denver are 12-15% higher than last year across the board. We put offers on three houses at the current asking price, no contingencies and an escalation clause of up-to-15%-above the asking…and we’ve lost out three times. Maybe we should take showers before we make the next offer, or better yet, offer the seller a round-the-world cruise on the QEII, or better yet half a bitcoin on top of the escalation clause.

  4. To call rising prices a bubble implies a bust in the not-distant future.

    I’m wondering what will bust the house price bubble.

    Supply – house building is a slow process, or rather locating and developing the land for tract SFH is slow. There is a big movement to rezone for row houses, duplexes and quadplexes, but those still get built a handful at a time.

    Demand – Millennials coming of age and WFH’ing, neither seem transitory. Consumer balance sheets are stronger than before. Unemployment is high, but I’m not sure that’s true for the home-buying demographic. Don’t forget the many-billion-dollar PE funds ready to snap up foreclosures.

    Rates – on $350K 30 yr, +100 bp is $200/mo more. Isn’t that like the gas and lunch money saved by only going to the office 2 days/wk? Might need +200 bp to choke off the demand. Is Fed going to let the 10 year go up +200 bp any time soon?

    Financing – banks are flush, they like mortgage lending, and neither party is going to choke off the GSE support for mortgages.

    Substitutes – if rents plummet, that could hit house buying demand, and maybe we’ll see that in NYC or SFO, but overall rents are stable and starting to inch up. Indeed, REITs are among the best looking sector charts and I’m wishing I’d bought more. Another substitution scenario would be if condos come back into favor. Right now in my city every semi-affordable SFH is getting 20 bids while condos are sitting unsold. Maybe Covid going away will make condos interesting again, if they suddenly sprout extra “home office” rooms.

    Yes, I think that today’s soaring house prices and all-cash bidding wars look very bubbly. And we all know that parabolic charts bode ill, when they represent mere pieces of paper or encrypted bits. But . . .

    Sometimes a bubble is actually a repricing.

    I don’t want to sound naive.

  5. The elephant in the room is affordability, no?

    Just last week I was speaking to a millennial making about $150k per year about housing. Is there any way he can cough up $800,000 for a two bedroom condo or $500k for a “starter” home well outside of town?

    Meanwhile, amateurs are back to flipping homes and foreclosure actions are getting packed with newbies, crowding out the regular vultures. Back to 2007 we go.

    jyl – I presume you are not recommending retail or office REITS? Warehouse and data-center REITS still may make sense, even apartment REITs at some point, depending upon location.

    1. That said, loving parents are stepping in to fund down-payments for their kids. We’ve seen that almost every week recently and. I’d guess that you have asbwell

    2. XLRE is doing better than other sector ETFs. Within XLRE, some of the best performers have in fact been office and mall REITs. I’ve instead been focused on apartment, medical, NNN and other kinds, that are pretty vanilla and meet specific criteria. With REITs, I don’t really want to take too much risk or get into complicated stuff like when a mall’s leases start to zipper. So I didn’t even bother looking at the mortgage REITs, sadly. I figure the REIT specialists can play with the complicated stuff.

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