1-866-646-8465

1-866-646-8465

Human hand poling house and bubble with needle against cloudy sky

Housing Bubble 2 and the Fog of Euphoria

AngelaRoberts

Written by Angela Roberts

Sep 13, 2018

“There was the greatest bubble I’ve ever seen in my life…. The entire American public eventually was caught up in a belief that housing prices could not fall dramatically.”  Warren Buffett, testifying before the Financial Crisis Inquiry Commission, 2010

Ten years ago, we were deep in the weeds of the Great Recession when American homeowners saw their real estate values decimated. The foreclosures, short sales, and delinquencies capped off a surreal atmosphere of contagious decline. It was hard to ignore the public auction signs, the dying lawns, and the neighbors who left without saying goodbye. Many of us simply kept our heads down, went to work, and told ourselves that it could not last forever.

So it comes as no surprise that Americans have gleefully embraced the steady increase in home values that has taken place since the infamous housing collapse a decade ago. According to June data from the Case-Shiller U.S. National Home Price Index, average home prices are 53 percent above the housing bottom of 2012 and an alarming 11 percent higher than the housing peak of 2006.

That 2006 peak has been designated as “Housing Bubble 1.” And according to the Index’s trajectory, we now find ourselves in “Housing Bubble 2” as home prices have surged faster than both incomes and inflation.

According to research by the University of North Carolina—Department of Statistics and Operations, the dramatic rise in home prices prior to the subprime mortgage meltdown was a clear economic warning: “Between 1997 and 2006, the price of the typical American house increased by 124 percent. During the two decades ending in 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004 and 4.6 in 2006.”

In 2018, the ratio has reclaimed pre-crisis highs as starter home affordability, in particular, has dipped to the lowest level since before the collapse.

Case-Shiller US Home Price Index ChartHome prices have now surged at an extraordinary rate just as they did prior to the subprime meltdown, and the recent falloff in price growth could be a caution light in the fog of euphoria.

Sagging home sales and subsequent drops in median home prices in key U.S. cities like Los Angeles, Seattle, San Francisco, Austin, Richmond, Toledo, and Honolulu have started what could be a worldwide housing meltdown.

In July, Bloomberg proclaimed that we’ve reached “the end of the global housing boom” and asserted that property prices are now sliding in global capitals around the world: “From London to Sydney and Beijing to New York, house prices in some of the world’s most sought-after cities are heading south.” They cite inflated values, lack of affordability, tighter lending criteria, and tax changes as contributing to the decline.

Likewise, a new wave of negative U.S. housing data for July adds to the angst with a cautionary tale of hot markets cooling, inventories rising, demand slipping, and mortgage rates on a forced march toward “normalization.” The cost of buying and owning a home has risen 14 percent in the past year, and with the Fed pushing rates ever higher, affordability has become the bane of all first-time homebuyers’ existence.

We now know that Housing Bubble 1 was unsustainable—as homeowners assumed highly leveraged mortgage positions while saving less, spending more, and extracting massive amounts of equity from their homes. When rates ramped up, defaults hit—and the impact was felt throughout the global financial system.

The inevitable demise of Housing Bubble 2 will either mark the end of the real estate recovery or the beginning of a fresh assault on household wealth. So now would be an opportune time to renounce the four most foolish words in real estate—“This time it’s different”—as well as the five other most dangerous words in real estate: “Let’s just wait and see.

Subscribe

Sign up now for latest executive insights and latest news delivered right to your inbox.
  • This field is for validation purposes and should be left unchanged.

Related Articles

Start diversifying today

   1-866-646-8465

As one of the largest distributors of precious metals in the nation, U.S. Money Reserve gives you access to our highly-trained team.

u.s. money reserve gold information kit
The Ultimate Guide

Free Gold Information Kit

Sign up now to receive the ultimate guide to gold ownership, unlock special offers, and more.