We're Definitely Not in a Housing Bubble

In 2005 and 2006, Financial Sense regularly warned that US housing was in a bubble. Now, with the national average above the 2006 peak (see below), does that mean we are in a bubble again?

This was the subject of our recent FS Insider interview with Rick Sharga, a leading expert at the largest online real estate marketplace in the world, Ten-X.

Rick Sharga: We’re Are Definitely Not in a Housing Bubble

"We're definitely not in a bubble. We have a handful of markets that are frothy and probably have hit an affordability wall of sorts but the fact of the matter is, while prices nominally have surpassed the 2006 peak, we're not talking about 2006 dollars. We've had 9 years of inflation to factor into home prices today...and, in fact, if you really dug into the analysis what you would find is that home prices today have basically recovered to about where they were in 2004."

This is true. If you look at a chart, inflation-adjusted home prices are exactly where they were in the first half of 2004.

But, then again, doesn't that mean that we could be just a year or two away from entering one? Not necessarily—it all depends on the growth rate.

From 2002 to the final peak in 2006, home prices were consistently growing 7.5% or greater every year and even jumped to as high as 16% on a year-over-year basis during the blow-off phase in 2005. Currently, home prices are appreciating around 6.5% each year. That's still pretty good, but still below bubble-level growth rates.

Could home prices head lower from these levels? Certainly, that's a possibility, though Ten-X believes we aren't likely to see a slowdown in prices until supply picks up relative to demand. Right now, there is about 4 months of existing inventories available and demand is still fairly robust. This is another important difference between the housing bubble period and today. The supply of homes skyrocketed in 2006, which eventually cratered prices.

Two other important differences Rick points out are lending standards and affordability. We all remember "NINJA" loans, right? No Income, No Job or Assets. During the housing bubble, lending standards were the loosest they've been in our lifetimes. It didn't matter if you qualified or not. Lenders were handing out mortgage loans like free candy at a time when the spread between home prices and incomes was the widest it's ever been.

Though 2012-2013 was probably the best time to buy from an affordability standpoint, home prices, Rick pointed out, are still quite affordable relative to median incomes and mortgage rates. Keep in mind, affordability will vary from region to region. 

Bottom line: Rick's assertion that we are "definitely not in a (housing) bubble" lines up with the data.