Intelligence

A new real estate bubble?

Milton Ezrati

Chief Economist

Housing prices have ticked up enough of late to rekindle interest in real estate investing. For some observers, however, these gains have raised fears of a new real estate bubble, especially in places like California, Nevada, and Florida, where the crash of 2008-09 fell hardest. Several business journalists and quite a few financial professionals have expressed similar concerns. Given what the economy and financial markets suffered 8-9 years ago, such feelings of caution are only natural. But except in very select regions, this economy, though far from impressive in many respects, runs little risk of such an event.

Home prices have indeed turned upward. According to the National Association of Realtors, the average price of an existing home nationwide has increased about 6.0 percent a year during the past three years or so. Unlike a bubble, however, the rate of increase has not accelerated. Those who fret over a bubble point out that the price increases have nonetheless outstripped the growth of household incomes. That is accurate. Incomes have grown at only a 3.2 percent during the past year. Still, this difference hardly speaks to a runaway situation. What is more, these real estate price gains fall far short of the double-digit pace they exhibited during the boom that ended so badly 8-9 years ago.

It provides additional comfort about a bubble that sales activity and has none of the frenetic character displayed in the run-up to the 2008-09 bust. New home sales have actually fallen during the two months to September, the most recent period for which data are available. They are indeed running about 30 percent over where they were 12 months before, but inventories of unsold structures are holding at a comfortable level of close to 5 months’ supply, where they have hovered for some years now. Arguing still more forcefully against the idea of a bubble, is how today’s rate of single-family home sales, at an annualized pace of about 609 thousand a year, though well up from about 510 thousand last year and 300 thousand back in 2010-11, is still almost 60 percent below the levels touched in 2006 and 50 percent lower than they averaged between 2003 and 2006.
Nor do rates of new building show any sign of the speculative froth. To be sure, starts of new residences, single- and multi-family, have risen. As of this past September, the Commerce Department has calculated that such construction has run at a yearly rate just over 1.2 million. Though well up from the deep lows of the 2009 great recession, this rate has hardly advanced from where it averaged this time last year and remains 50 percent below the rate of 2.4 million a year touched at the furthest extent of the 2005-06 bubble.

Especially powerful evidence emerges from various measures of affordability. For decades the National Association of Realtors has tracked the burden of home ownership by weighing the cost of supporting a mortgage on the average home against household income, both in particular regions of the country and for the country as a whole. Though real estate prices have outstripped household incomes, mortgage rates have come down during this time enough to more than offset the effect. Indeed, mortgage payments on a home in this country has fallen in the past 12 months on average from 15.6 percent of median family incomes to 15.3 percent. Affordability overall, which implicitly includes taxes and insurance, has actually improved, albeit by a relatively modest 2.2 percent. Though such affordability measure are nowhere near as strong as in 2012 and 2013, when real estate prices were still deeply depressed, this critical measure today remains far better than when the past real estate bubble was blowing up and, tellingly, also far better than any time in the 1990s. Except for those few years right after the housing collapse, one would have to go back to the early 1970s to find affordability figures as good as today.

Of course, these are national averages. Some regions of the country have had very different experiences. Prices have risen especially fast in Florida. Fort Myers, for instance, has seem affordability erode by some 16 percent during the last couple of years. Daytona Beach has seen a 14.5 percent drop, Port St. Lucie a 19.5 percent drop, and Jacksonville a 21 percent drop. Spots in Nevada, too, have seen such erosions, most notably Reno’s 19 percent decline in affordability. But even in these places, housing remains far more affordable than in 2008, while other regions of the country, including remarkably the New York and Washington, DC metropolitan areas, have continued to see modest improvements. To be sure, mortgage rates will not fall much further and may rise. That will certainly detract from affordability, as will likely hikes in real estate taxes and insurance rates. But such adjustments at this stage in the business cycle are hardly surprising and hardly point to the bubble that some seem to fear.

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