Housing is Heating Up, But Not Yet in Bubble Territory

Househappy —  October 1, 2013 — Leave a comment

With housing prices rising rapidly, the question on everyone’s mind is, “Are we entering another national bubble?”

According to the S.& P./Case-Shiller Composite-10 Home Price Index, U.S. home prices were up 18.4% in the 16 months that ended in July––not much smaller than the largest 16-month increase of 22.7% during the housing bubble that preceded the 2008 financial crisis.

“Is it possible that we are lapsing into what I call a bubble mentality—a self-reinforcing cycle of popular belief that prices can only go higher?” Asks economist Robert J. Shiller, partial eponym of the Case-Shiller survey.

Referring to questionnaires sent out to random samples of homebuyers in Boston, Milwaukee, Los Angeles, and San Fransisco, Shiller concludes that while Americans aren’t showing the same bubble-era “irrational exuberance” and are still relatively sober about housing, they aren’t being completely realistic either.

“The results suggest that though we are not in a bubble now, there are troubling signs that we may be heading toward one,” he said. “I see no signs that home buyers have learned the lesson…that existing-home prices have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century. While land is limited, it’s only a small component of home value in most places. New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices.

“People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy. The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don’t seem to be prompted by the anticipation of another housing boom.

“That’s the thinking at the moment. But whether these attitudes mutate into a national epidemic of bubble thinking—one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors— remains to be seen.”

This article can be found in its original form on NYTimes.com

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