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Is this Housing Bubble 2.0?

10/6/2015

By Michael McKeown, CFA, CPA - Chief Investment Officer

The housing bubble and recovery are a relic of the past.  Several cities have residential home prices hitting new post-crisis highs in the United States. 

Source: S&P Case-Shiller, Reuters, Aurum

Thanks to several years of little new construction, population growth, low interest rates, and robust local economies, many areas are on fire again.  Charlotte, Dallas, Denver, and Seattle are among the leaders from the 2006 peak levels.  In contrast, Cleveland is barely off the floor from the levels in the year 2000 (at least better than Detroit, though not saying much).

At a national level, U.S. prices are at the equivalent of 2005 levels and grew at a 5% year-over-year rate in the last 12 months.

Housing makes up 42% of the Consumer Price Index and over the last year grew at 3.1% as demand outpaces supply.  As long as salaries and wages keep growing, this should not inhibit the consumer too much at this stage.

 

“Job Boom Leads to Housing Shortage” – Channel 3 WKIT – Forest City, Iowa

“Silicon Prairie: Tech Hubs of the Heartland Lure Young Talent with $160,000 Homes” – Bloomberg News – Lincoln, Nebraska

As the location of the first quote suggests, the housing supply issue is not just in the flourishing coastal cities like Seattle and San Francisco.  Meanwhile, debates around rent control and the lack of space continue in the booming tech towns, making some eschew the regions for more affordable options.

To answer the question posed in the title, are we in the midst of second housing bubble in a decade?  It depends.  Over the last 15 years, the national 20-city composite index is up 82% or about 3.9% per year.  If we subtract out the rate of inflation over this time frame of 2.2%, then housing prices increased at a real rate of 1.7%.  Professor Robert Shiller, who correctly predicted the housing crisis in the mid-2000s, essentially showed us that housing should keep up with inflation and provide a 0% real return.

The housing supply constraint of many cities will put upward pressure on prices during this expansion phase.  Several areas seem like prices are disconnected from the underlying fundamental values.  Nonetheless, real estate values are a demographically driven market and the population migration to the coasts and Sunbelt regions justify the above average real return of housing over the last decade and a half. 

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates

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