Is the Bubble Back?
Housing bubbles are measured by comparing current prices to a reliable index of housing prices. Fortunately, we have one acccording to The New York Times. The United States Bureau of Labor Statistics has been keeping track of the costs of renting a residence since at least 1983; its index shows a steady rise of about 3% a year over this 30-year period. This is as it should be; other things being equal, rentals should track the inflation rate. Home prices should do the same. If prices rise much above the rental rate, families theoretically would begin to rent, not buy.
Housing bubbles, then, become visible — and can legitimately be called bubbles — when housing prices diverge significantly from rents.
In a housing or real estate bubble, home prices increase because of overly optimistic speculation that the prices will keep rising. When people can't afford to keep up, the bubble bursts. Demand for homes decreases, while supply goes up and home prices drastically drop. Today, certain markets across America are seeing home prices go up so quickly that people are starting to worry about another bubble.
As David Stockman, former director of the Office of Management and Budget under President Reagan, told Yahoo! Finance, a disproportionately large chunk of home sales has been driven by investors buying up distressed properties and betting on being able to flip them for big profits once prices rise further. But the everyday homebuyers (first-time buyers and buyers trading up for larger properties) that investors would need to sell to have been mostly staying out of the real estate market
"I would say we have a housing bubble again," said Stockman, who recently has been working in the private equity sector. "We don't have a real organic sustainable recovery because, in a world of medicated money by the central bank, things aren't what they appear to be. ... It's happening in the most speculative subprime markets, where massive amounts of 'fast money' is rolling in to buy, to rent, on a speculative basis for a quick trade. And as soon as they conclude prices have moved enough, they'll be gone as fast as they came."From 2000 to 2006, home prices were skyrocketing. Why? It was fueled by overly-optimistic speculation on real estate, careless lending standards and very low mortgage rates. At the height of the bubble, homes were overvalued by 39%.
Built on that shaky foundation, when prices cooled millions of people defaulted on their mortgages and the bubble didn’t just burst, it exploded, creating the biggest real estate and credit crisis in modern history. Fast-forward to the present day, and we’re still in recovery mode. With tighter lending standards it’s harder to buy a home, but in the past two years certain markets have seen prices rise rapidly again, leading some to wonder if history will soon repeat itself.
California is one of the most overvalued market in the nation. Prices there have increased about 17% year-over-year, with Orange County being the hottest metro area. The increases in California are more generally due in part to investors taking up the tight supply and tech millionaires willing to pay premium prices. The other overvalued metros, like Honolulu, Austin and Miami, are also dealing with high demand and tight supply.
If we expect to prevent the next crisis, we have to prevent the next bubble, and we will never do that without eliminating leverage where it counts: among home buyers.
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