The Housing Bubble is Even Bigger Than the Stock Market Bubble

Mish

Economist Robert Shiller compares bubbles.

Stocks may be expensive based on historical measures, but it’s nothing compared to skyrocketing home values says Robert Shiller. 

Please consider Home Prices Are In a Bubble. Full Stop.

Consider that the Case-Shiller National Home Price index has gained in excess of 6% per year on average since January 2012, while net rental income has barely kept up with inflation, increasing just less than 2% per year. The result is that home prices seem as overvalued as they were in the spring of 2005, nine months before the peak.

One way to measure home valuations is with a cyclically adjusted price to earnings (CAPE) ratio developed by Yale University professor and Nobel Laureate Robert Shiller for stocks. The concept can be applied to a broad swath of assets by dividing the current price of an asset by the average annual inflation-adjusted earnings over the prior 10 years. The chart above shows CAPE for U.S. home prices and the S&P 500 Index since 1996. 

The bad news is all previous history came at higher mortgage rates. The average 30-year fixed mortgage rate fell below 3% for the first time in August 2020, and rates are close to the lowest possible levels given the credit risk and costs of writing mortgages. It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernable upside.

Median Household Income vs Case Shiller Home Prices 

Median Household Income vs Case Shiller Home pricers

Shiller compared home prices to stocks based on CAPE. To compute the CAPE for housing he used rent.

My chart looks at  household income vs the Case-Shiller Home Price Index. Both indexes have a base year of 2000.

Household income is annual and the latest year available is 2019. I used Case-Shiller quarterly data.

Since 2000, median household income is up about 64%. Home prices are up 118%. 

Robert Shiller calls this a bubble and so do I.

Correction

I accidently posted a chart of real income vs nominal home prices. 

The corrected chart shows nominal household income vs home prices.

Mish

Comments (62)
No. 1-30
JoeDokes
JoeDokes

No, just pretend, and it isn't.

Mr. Purple
Mr. Purple

Fear not! Judy Shelton to the rescue!

/sarc, I think?

Sechel
Sechel

I'm not worried unless mortgage debt begins to exceed market value less an appropriate haircut. This only becomes a problem if mortgages become underwater

Doug78
Doug78

Definitely a bubble but the biggest bubble parts are localised on the coasts.

numike
numike

Well we know someone is moving out: https://twitter.com/scotwilliams/status/1327551331800854529

Greggg
Greggg

What will be more interesting is the gymnastics that they go through trying to re-ignite that dumpster fire.

Eddie_T
Eddie_T

Certainly real estate is in a bubble. Real estate has boom and bust cycles. We’ve seen it our whole lives...

It’s still a tangible asset with some residual value in the worst market....In just about any scenario I can imagine, real estate is as good an asset to own (in this country, anyway, because of our tax structure) as anything else you could possibly invest in.

And...it becomes a better investment when you can couple a high value property with a high quality liability......like 30 year fixed interest mortgage money locked in at the lowest rates in a generation.

Like it is with most asset classes, making money in real estate requires exercising prudence.

In a system like ours, we deal with crashes when bubbles pop. Usually people make the mistake of using too much leverage to try to gain wealth quickly .....in RE, this is especially common.

But...in this environment...with helicopter money and QE both already happening and likely to happen some more.....I’d bet that the RE bubble gets a whole lot bigger before it pops. But it isn’t a monolithic market.....there are always locations that will be winners....and others that will be losers. It isn’t like stocks or bonds in that respect.

So....you can call it a bubble...I call it equity. To each his own.

vanderlyn
vanderlyn

this analysis passes the smell test, too. the r/e cycles are long, but clear.

Intelligentyetdiot
Intelligentyetdiot

I dont think real estate will come down as long as we keep interest rates below the inflation rate, we might see some slowing but at any such juncture the Fed will come to the rescue. Its a different world now with the Fed in charge printing trillions left and right.

caradoc-again
caradoc-again

Wealth effect for housing is forceful. Lets hope it doesn't go into reverse with the other negative forces currently at work.

All points to even lower rates and bigger bubbles to keep the show on the road until some event kicks off a series of historic collapses across a spectrum of assets.

Higher and higher systemic fragility, sensible to get out of the system/market.

Realist
Realist

Real estate is overpriced, in particular retail and office space. By how much I don't know. Is it a bubble? Maybe.

In terms of personal property, the pandemic has certainly enticed people to yearn for a parcel of land with a house on it as opposed to high density, high rise housing in major cities. As always in life, change happens.

No matter where you live, you can expect markedly higher property tax rates going forward, as governments deal with the enormous costs they have incurred dealing with the pandemic. Not to mention all other taxes. Too bad the pandemic was handled so poorly. Of course, the US has so many things that prevent it from an effective response.

A narcissistic moron President Trump.

A lack of federal leadership and a large number of States who will oppose whatever the federal government does recommend.

A population with way too many morons who would rather die than wear a mask or listen to an expert.

A health care ”system” that is not a system at all, but an uncoordinated mess of profit driven companies that end up costing the the country twice what other countries pay for health care

In short, it's a mess. It won't be long until you hit 200k cases per day and 2k deaths per day.

That won't be good for the economy, or for real estate.

caradoc-again
caradoc-again

Wealth effect for housing tends to be higher than that for stocks.

Stripping out that positive impact makes recent economic performance look even more anaemic.

It's all an illusion and when reality hits, unwind occurs, the shock will be massive.

Tanner D
Tanner D

Would a bubble in money supply or expansion of money/credit be able to negate the bubble aspect? As in all things going up together. AKA inflation. Genuine question from a novice just trying not to loose his nest egg.

QTPie
QTPie

“Since 2000, real median household income is up about 10%. Home prices are up 118%.”

Mish, you can’t mix real and nominal values when making a comparison. Either use all nominal or all real indicators.

ghosalb
ghosalb

exellent post....just like japan in 1989, when both RE and stocks were bubbles together...if u add both bubbles, it is 75 (2000), 70 (2006) and 75 now (2020)....probably nothing

Mish
Mish

Editor

I have a simple policy.
When I make an error I issue a correction and an apology if the error is big enough.

Casual_Observer
Casual_Observer

It's a Fed supported bubble. It isnt going to deflate. This one of actually propping up assets to save pensions, 401ks and bondholders.

nzyank
nzyank

Silly to conclude there is a house price bubble by comparing to rental rates. Of course house prices have gone up in comparison to rents as interest rates have fallen, as this makes houses more affordable and also allows investors to keep rents lower. This doesn't mean there is a house price bubble that will pop. What will cause house prices to fall?

  • Inflation is dead for the foreseeable future (excluding house prices and medical)
  • Interest rates will be negligible for foreseeable future - the negative economic consequences of increasing interest rates are too great to allow rates to increase measurably.
    US Housing affordablilty index does not indicate a bubble.
    California housing affordability index also does not indicate a bubble - the index peaked back oin 2012.

https://www.statista.com/statistics/201568/change-in-the-composite-us-housing-affordability-index-since-1975/#:~:text=Composite%20housing%20affordability%20index%20in%20the%20U.S.%202000%2D2019&text=The%20composite%20Housing%20Affordability%20Index,the%20historical%20norm%20of%20128.

Dodge Demon
Dodge Demon

The air will slowly seep out of the bubble, one boomer funereal at a time.

Johnson1
Johnson1

FWIW. Biden is putting the Obama military complex back together.

Biden announced his Department of Defense landing team on Tuesday. Of these 23 policy experts, one third have taken funding from arms manufacturers, according to a report published this week by Antiwar.com.

A knot of hawks
Leading the team is Kathleen Hicks, an undersecretary of defense in the Obama administration, and an employee of the Cen­ter for Strate­gic and Inter­na­tion­al Stud­ies (CSIS), a think tank funded by a host of NATO governments, oil firms, and weapons makers Northrop Grumman, Boeing, Lockheed Martin, Raytheon, and General Atomics. The latter firm produces the Predator drones used by the Obama administration to kill hundreds of civilians in at least four Middle-Eastern countries.

Hicks was a vocal opponent of President Donald Trump’s plan to withdraw a number of US troops from Germany, claiming in August that such a move “benefits our adversaries.”

Two other members of Biden’s Pentagon team, Andrew Hunter and Melissa Dalton, work for CSIS and served under Obama in the Defense Department.

Scooot
Scooot

House prices usually fall due to forced sellers, caused by unemployment. So far the furlough schemes etc have minimised it’s effects.

BDR45
BDR45

There's a higher preference for homes than securities. One cannot live in a stock certificate or brokerage account.

SmokeyIX
SmokeyIX

With Biden coming into office, housing values can go down when good neighborhoods get transformed into Section 8 Bidenvilles.

anoop
anoop

according to cr, there is no bubble in housing. there is no bubble in stocks either, although there is some over leverage. For something to be in a bubble, there has to be rampant speculation.

Casual_Observer
Casual_Observer

Is there any evidence that the stock market is responsible for keeping housing prices high ?

Denver1
Denver1

What a pleasant breath of fresh air after a year of political drama hate on the Thump. It is strange you don't give some corrective advice to the incoming administration. I can't see any policy coming that won't jump the bubbles even more.

Mish
Mish

Editor

If you want to be banned - It's easy. Make a comment like this :

"WTF, Is this MSNBC, or CNN. Must have fat fingered the wrong bookmark. I was looking for an objective financial/economic blog. Not some “orange man bad” hit farm political pundit site."

Augustthegreat
Augustthegreat

A better picture would be the Ratio between the housing price index and the median household income. It looks like today's ratio is still below that of last bubble. With today's historical low mortgage rate, I'd expect this ratio to also reach historical high. Affordability today has not reached historical low yet.

vanderlyn
vanderlyn

NOTHING close to what happened in 2004/5/6.............phoenix market went up 40% in like 2 years back then, and liar loans put morons under water fast. the bubble is our empire of idiots. real estate is fine unless folks are under water.


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