Why there might be a House Price Bubble on the Horizon

In summer 2013, new evidence continued to emerge that there might be a house price bubble on the horizon once again. Such fears have led to jittery markets on several occasions since the 2007-2008 credit crisis. Once again, the new data indicate that the fundamental problems which led to the first credit crisis have not been resolved, and could spark yet another.

The alarm this time around, according to real estate advisor Linda Strasberg, comes from the fact that “some real estate markets are experiencing rapidly raising princes, bidding wars and scarcity of inventory.” Strasberg cites new research from the Trulia real estate analysis firm, indicating that American housing prices were deemed “overvalued” by 37 percent in 2006, collapsed to 15 percent “undervalued” in 2011, but are now rising again. As Nick Timiraos of the Wall Street Journal makes clear, the new Trulia data doesn’t suggest that there is a housing price bubble about to burst. However, it does suggest that the same trends that ultimately triggered the market collapse several years ago may be at work again, leading to serious problems down the road. For now, he says, the Trulia data is still consistent with a “rebound,” as opposed to a “bubble.”

Despite optimism about the housing market, indications that real estate prices may be in for another downturn have arrived from many countries around the developed world. Moreover, in the United Kingdom, Telegraph reporter Emma Rowley says that housing prices have risen significantly over the past year, while interest rates remain low and average incomes lag behind – the same sort of conditions which contributed to the credit crisis several years ago. For now, the numbers do not seem like a real cause for alarm for Rowley. Once again, she notes that if the same trend continues for several years, it could eventually leave new home owners in a situation where sagging incomes and rising interest rates render sky-high housing prices suddenly unaffordable. In Australia, where Citi Research has identified similar housing price trends, the data has been greeted with the same assessment that – at least for now – there is no need to panic.

Those reassurances may come as cold comfort to investors and home buyers alike. After all, except for those tuned in to the more skeptical economic analysis circles, there was very little warning before the last bubble burst, either. Joseph Salerno of the Ludwig von Mises Institute, a free-market think tank, points out that while some correction in housing prices is to be expected, the rapid rise in some American markets is starting to look more like a bubble fuelled by the Federal Reserve’s extremely low interest rates. In Phoenix, he notes, housing prices jumped a stunning 23 percent over the last year. In Atlanta, the lower tier of the housing market jumped by an even greater 36 percent. Most of that growth occurred just in the first months of 2013, which means that – at least for the moment – the trend is accelerating. That could be a warning sign that housing price recovery is turning into a housing price bubble.

Salerno’s concerns are echoed by George Leong of Investment Contrarians and Dean Baker of the Center for Economic and Policy Research. According to Baker, “this rapid increase in house prices should be prompting serious concern.” When banks grew jittery about extending credit to other firms (and even to one another) during the credit crisis, the Federal Reserve and other central banks tried to restore confidence by lowering interest rates to almost unprecedented low levels. Several years later, those low rates are still in place, and some economic analysts fear that what appears to be an ongoing economic recovery is actually just another bubble enabled by the policies put in place by the central banks.