Things selling fast, or prices going up fast, don’t necessarily make for a bubble. To me, a necessary condition of a bubble is that valuations are extremely high on a historical basis. We just aren’t there on housing — not even close.
I have been meaning to update the long term valuation charts and will soon when I get some time. But, just extrapolating from last year’s chart, we are probably pretty close to “fair value” (which I define as the median historical price to income or price to rent ratio).
More charts soon-ish![/quote]
I wonder if the shift in market mix is hiding the price inflation of housing, though. In our neighborhood, and other mid to high-mid areas that I’ve been following, prices are pretty much back to bubble highs.*
The NINJA/junk mortgages were driving speculative activity during the early-mid 2000s bubble; but artificially suppressed inventories, historically low interest rates (held low for far too long…yet again) and the inability of investors to earn yield on other investments is what’s driving speculative activity this time around. They *might* have more staying power, but many/most of them seem to have a 5-7 year disposition plan…and everything I’ve heard or read from these people makes it sound like they are expecting some pretty hefty price appreciation in the interim.
It would also be interesting to see how cost inflation in other things like energy, food, healthcare, etc. might affect a home buyer’s ability to pay prices that are in line with historical norms. IOW, what if, in the distant past, housing took up 30% of a household’s budget, with food, healthcare, energy, etc., taking up 40%, leaving ~30% for savings and disposable income…how does that look vs today’s home buyers’ expense allocations? Also, DB pensions, job stability, expectations for future raises/wage inflation, the ability of a stay-at-home spouse to earn a second income (when they were accustomed to living on one income) etc., would all play a part in how much money a household could allocate toward housing costs. And then, there’s the interest rates that would greatly affect home price/income ratios.
*Edited to add that prices are actually all over the place. Not sure how appraisers are valuing things, but there are very large divergences between different sales (some strangely low, yet another similar house nearby might be $200K+ more, very near bubble highs). The presence of flippers along with the extremely low inventory in many areas is really adding to the wild pricing.
