Housing Bubble 2.0

In January, prices of homes gained 8.1 percent from the previous year according to the latest stats from the S&P/Case-Shiller home price index.

The index tracks home prices in twenty major cities, and prices rose in all twenty.

Another home price tracker, CoreLogic, found that home prices jumped even further, 9.7 percent nationally over the past year. Coincidentally, the year-over-year gain was the biggest since 2006, just before the burst. With this seemingly rapid recovery, the question is: is it too fast, too much, too soon?

With interest rates at unprecedented lows for an extended period, more and more consumers are taking advantage of mortgage rates, and housing markets are in recovery, pushing prices back up. Improving unemployment numbers are also correlated.

Or is this recent boom in the housing market simply a correction?

Since remaining unchanged from 2006 to 2007, housing prices fell year-over-year a full 37 percent until 2013. From CNNMoney:

Housing starts have also been on the rise. Earlier this month, the Census Bureau reported that housing starts on single-family homes had risen to their highest levels since 2008: 618,000 in February.

As a leading indicator, housing starts could signal confidence in continued recovery and growth in the housing market.

However, many think that the persistent quantitative easing on behalf of the Fed should have already caused the Fed’s unemployment target of 6.5 percent to be reached. Analysts at Bank of America Merrill Lynch believe that QE3 is creating an inflation of assets, most notably in the housing sector.

Other signals like increases in first-time homebuyers and institutional investors have resulted in a demand that has not been met by the current housing supply, fueling the price balloon.

Karl Smith, assistant professor of public economics and government at the University of North Carolina at Chapel Hill, wrote in a March 25th article for Forbes “the rapid increase in the number of buyers and their purchasing power will likely drive home prices into a bubble. Likely not as large as 2005, but it’s not out of the question that the bubble could be even larger.”

So while we may be building and buying more houses, driving prices up, this kind of growth does not appear on the surface to be sustainable in the long run. We could be creeping, or sprinting, toward the burst of yet another housing bubble.

- Logan Allen