Is The Housing Bubble Rising Again?

Home prices recently recovered to early-2004 levels -- or to where they were about three years before the housing bubble peaked. As the housing market continues to rally, retracing price points set more than nine years ago, it raises a question: Is the housing market poised to repeat the boom-and-bust cycle again?

A comparison of related factors shows that while housing prices may be the same as they were in 2004, other things are quite different.

1. Home prices

According to the S&P/Case-Shiller Home Price Indices, composites of housing prices in 10 and 20 major U.S. metropolitan areas have recently recovered to levels originally reached in early 2004. This is the result of a double-digit percentage rally over the past year. Prices were also rising sharply back in 2004, but in that case they had already been on the rise for about seven years. In other words, home prices may once again be rising, but the market is still much earlier into the rally than it was in 2004.

2. Inflation

While home prices may seem to be on par with 2004 levels, there has been roughly 23 percent of inflation since then. On an inflation-adjusted basis, housing prices have still lost ground since 2004. This could be another argument for why the housing market is still reasonably priced at this point.

3. Mortgage rates

Current mortgage rates are up to about 4.5 percent, having risen sharply since early May. In the context of recent history, today's mortgage rates may seem a little high, but back in 2004 they averaged 5.84 percent. This makes buying a home more affordable now than it was in 2004.

Affordable interest rates can cut both ways when it comes to stabilizing housing prices. Reasonable mortgage rates help people meet their mortgage obligations, but they can also help fuel a bubble in prices. In any case, the dynamic may change yet again if mortgage rates continue to rise.

4. Investment environment

The climate for stocks is similar now to what it was in mid-2004. Then, the stock market was on a bit of a roll, having climbed by nearly 40 percent in less than two years. However, this was a bounce-back from a drop of more than 50 percent previously. Today, the stock market is on a run lasting more than four years that has seen prices more than double. Once again though, that rally represents the market fighting its way back after prices fell by more than half.