Thursday, May 16, 2013

Bubble Talk

Here is an article from Bloomberg on rising home prices and the potential for "bubble threat."  A bubble is a when prices rise to unsustainable levels, presaging an inevitable price decline.  This article was one of the most thoughtful I have read on the fast housing recovery.  Passages like the two below are evidence of a strong housing market:
An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

I am not convinced that a strong housing market automatically translates to a bubble.  The market only bottomed a year ago, after peaking in 2006 (and earlier in places like California, Las Vegas and Phoenix).  That is six years or more of declines or flat prices.  One year of 11% gains is not going to erase six years of price erosion.  The article states that prices declined 35% from their 2006 zenith, and are still 29% off the top.  To me it seems like the housing market has a long way to run.

Later in the article a more sober assessment is presented:
It’s too early to say another bubble is emerging. So far, the biggest gains are limited to hard-hit markets such as Phoenix and Las Vegas and thriving job centers such as San Francisco, while prices are falling in cities such as Chicago and Indianapolis, according to CoreLogic. Nationally, existing-home sales are about a third off a 2005 peak and home construction is down by 66 percent. Also, in contrast to the easy lending of the boom years, mortgage standards are strict.
The article touches briefly on lack of inventory, which presents a classic supply and demand situation - too many buyers chasing too few homes (see the Brooklyn example above).  In the article, institutional investors get the bulk of the blame for lack of inventory because they have bought so many homes, with Blackstone alone buying 24,000 homes.  Institutional investors aside, there is an overall lack of inventory.  Calculated Risk, through economist Tom Lawler, noted yesterday that inventory is 16% below last year's level.  Low supply is going to push up prices.

It's hard to call a bubble when your in the middle of one.  Denial plays a large part in bubble mentality - "It's different this time" - and I don't see that yet in housing.  

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