Why Bubble Talk Doesn't Hit Home

Where the Bubble Isn't 'Housing P/E's' -- the ratio of average home price to average household disposable income -- have remained well within historical norms

Source: Standard & Poor's.

"After the equity collapse, especially the Nasdaq, there's a manhunt for the next bubble," says Anirvan Banerji, director of research of the Economic Cycle Research Institute. "But housing on a national basis doesn't look like one."

Banerji says his leading index of housing prices indicates they will continue to rise. "The housing index was not fooled by the economic recession -- it remained on an upward trend -- and still suggests a cyclical downturn in prices is not imminent."

The realtors association, in fact, projects that existing home prices will rise 6.6% to $157,000 in 2002 and 4.2% in 2003. The association sees new home prices rising 5.5% to a median of $184,800 this year, and another 5% next year.

Another key signal that housing won't collapse is tight inventories. Unlike the 1980s, when a run-up in prices fueled a building spree and supply glut, the inventory of existing homes stood at just five months at the end of August -- ticking up from 4.6 months. That's still on the low end of the historical grid. Back in 1990, when home prices came close to declining on a national level, the inventory of homes on the market rose to nine months.

And despite the tough economy, "personal incomes have grown very strongly as well," says Chris Mayer, a real estate professor at University of Pennsylvania's Wharton School. Mayer recently studied rising housing prices in relation to household incomes and found that, with a few regional exceptions such as Silicon Valley in California, and parts of Florida, they have moved in tandem.

"In the aggregate, house prices have not gone up so fast," Mayer said. "This was not the case in the late 1980s," when housing prices outpaced personal-income gains.

Indeed, Standard & Poor's, which tracks "housing P/Es" -- the average home price compared to average household disposable income -- finds that what people are now paying for their homes is well within historical norms of about 2.5 to three times household income. That stands in marked contrast to the equity bubble, which sent P/E multiples well above normal levels.