Is the U.S. in a housing bubble?

Here's a case against claims that the U.S. is in a housing bubble this cycle.

It goes without saying: The news that home prices are going up is good or bad depending on who you are.

While the year-over-year growth in home prices may benefit the real estate investor or an individual seller, it also can lead to affordability issues for certain prospective buyers.

One of the benefits of having a housing market that is not overheating with demand is that year-over-year growth in real home prices remains low.

While it may seem alarming, it is bullish for housing that year-over-year real home prices went negative last year on all three levels of the Case Shiller index, as seen below.

Despite what some want you to believe, this housing cycle is not in a bubble. Look at the difference in the metrics for the real bubble years of 2002-2005 compared to the current cycle years 2012-2020.

Unlike the bubble years, purchase application data, existing home sales, new home sales, housing starts and the lack of cash-out refinancing all point to slow and steady growth. Nothing about this cycle warrants the discussion of record-breaking demand or bubble talk.

With the latest Case Shiller home price data – which lags a bit still – real home price gains nationally are only up 0.3% year over year. Meanwhile, the 10-city composite is still down -1.2% and the 20 city composite is down 0.7%. The longer we stay at these levels, the better it is for everyone.

Even though existing home sales for 2019 were flat, the monthly supply of homes, which had been increasing early in 2019 compared to the previous year, dropped noticeably later in the year. This happened as housing demand picked up.

Homeowners, who in the past would move into larger homes after five to seven years, are staying in their homes much longer.

So what does this all have to do with a housing bubble?

The increase in housing tenure means inventory will be low, which helps to boost nominal home prices.  An additional factor likely to affect home prices is that the U.S. population is entering into a large demographic patch of ages 26-32. (See below)

Since the median age of the first time home buyer is 33, we can expect stable replacement in buyer demand once these folks become ready to buy.

For those who do need to move up to bigger homes, the loan quality in this cycle is excellent. We do not see a boom in cash-out refinancing or exotic, high-risk loans. Most crucial, homeowners today, in general, have excellent cash flow. They are qualified and comfortable homeowners with nested equity – especially those who bought homes from 2010-2016.

Mortgage rates are still low. And as long as they stay this low, real home prices can be positive in 2020, but not overheat like what we saw from 2002-2005 and 2013.

Increasing housing tenure, a substantial young demographic patch and low mortgage rates are creating a backdrop for growth in real home prices to be positive again in 2020. In my opinion, nominal home price growth above 4.6% will not be bullish for the housing market, long term.

For now, however, we don’t have an overheating market in existing home sales, real home price gains, new home sales, housing starts or purchase applications. Growth in all these areas has been slow and steady. And slow and steady growth is bullish, not only for housing but for the economy. This is very different compared to the housing bubble years.

If I were granted a wish, it would be that we stay at these levels of slow and steady growth for years to come – but the economics don’t abide by hopes, and dreams rarely come true in economic land. That said, I’ll enjoy this bubble-less time while it lasts.

By Logan Mohtashami