Signs Of A Bubble
Bubbles are notoriously hard to recognize in real-time, but there are certainly telltale signals to watch in the housing market. Per-capita U.S. income was up 25 percent from 2011 to 2018. During that same stretch, housing prices nearly doubled that gain, rising 48 percent.
The Case-Shiller national home price index hit a record high in November 2016. It is now more than 10 percent above its 2007 peak. In certain cities, the market seems even more overheated.
Housing prices in Denver and Dallas are 40 percent above 2007 peaks. Portland and Seattle housing prices are 20 percent above 2007 highs. There are already signs that these overheated markets are cooling off. Seattle home prices are down more than 5 percent from their 2018 peak, the largest drop since the last crisis.
Prices in San Francisco, Los Angeles, San Diego, Denver and Portland are also down in the past five months.
As of the end of 2018, CoreLogic found that roughly one-third of the nation’s 100 largest metropolitan housing markets were overvalued.
The rapid ascent of housing prices in the past decade has some experts concerned about where prices are destined over the next several years.
Stack Financial Management President James Stack warned his investors prior to the last recession about a “dangerous bubble” in the real estate market and predicted a “$1-trillion-plus government bailout of the mortgage industry at some point over the next decade.”
At the time, it was an extremely bold call, but it ended up being a scenario that played out exactly as Stack predicted.
Unfortunately, for more than a year now, Stack has said he is seeing a troublingly familiar setup.
“Median family home prices are 32 percent above the long-term inflationary trend — in other words, it has to fall 32 percent to get down to where it was,” Stack said in late 2017.
“That’s not as bad as the 35 percent in 2005, but it does kind of wake you up and say, ‘this isn’t normal, this is going to end badly.'”
Even Nobel Prize-winning economist and housing market expert Robert Shiller recently said the U.S. market is looking a lot like it did in 2006.
“It has been going up linearly for six years now, that’s something that can’t continue,” Shiller said in November.
The good news is that he said a potential drop in home prices will likely not be nearly as severe as the one in 2007, but there could be a “significant correction or bear market” in U.S. real estate in the near future.
The iShares U.S. Home Construction ETF (ITB) was trading at $34.95 per share on Thursday afternoon, up $0.01 (+0.03%). Year-to-date, ITB has declined -19.96%, versus a 3.42% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Benzinga.