Is Housing Bubble 2.0 Forming?

Home Price Index  Source: fhfa.gov 

HPI_PO_monthly_hist

Are we in a housing bubble again?  I say yes a small one, but we are there.  Certainly another bubble is being blown.

The first thing that triggered my interest was that the House Price Index broke the previous peak set in the summer of 2007 and has continued to make new highs every since.  Also the March 2016 increase in the index was 6.1%.  Big red flag when inflation is supposedly under 2% justifying ultra low interest rates.  I've been seeing large home price rate increases for awhile, so today I decided to dig in deeper.  Let's look a  little closer at what the chart above shows.

The blue multi-decade home price trend line created from data going back to 1980 seems to show home prices are right where they should be or only slightly high.  This is a 3.7% annual growth rate.  However we must remember we are in a deflationary period and even now supposedly inflation is only 2%.  Indeed wages certainly haven't been rising 3.7% annually and certainly not since 2008/2009.

From the red 2.5% trend line starting in 2008 we can see house prices are up over 2.5% annually since the end of 2008.  While after multiple years of declining wages and deflation elsewhere, even now wages and overall inflation is only around 2.0% annually.

If we reference current home prices to the 3% annual housing inflation rate that occurred from 1991 to 1998 and that trend line was touched during the recent housing bottom, or a housing inflation rate trend line of 2% starting from the housing bottom,which actually exceeds overall inflation over the same period it is easy to see home prices are very inflated and continue to rocket higher.  Since the data is reported with a 3 month lag I projected where the index is likely to be now and will be at the seasonal summer peak.  It appears by midsummer home prices will be 15% over the long term 3% trend line starting in 1991 that was touched  again in 2011 after the bubble popped.  I guess one can argue there is little to worry about since it is only about 4% over the much longer trend line, but remember we are in a deflationary stage, wages are terrible and few have any savings to speak of.  And we are likely nearing or at the top of the current economic cycle.  Of course the current condition is not near as bad as it was in May 2006 when home prices were over 40% above the green 3% trend line.

But what is most alarming is the current growth rate in home prices.  The orange trend lines show the current growth rate matches the excessive growth rate from 1998 to 2002, that became even more excessive until mid 2006.  This is really alarming knowing the current Fed funds rate is still below 1% and 30 year mortgage rates are under 4%.  During the creation of the last bubble mortgage rates were well above 5%, even in the 6-7% range.  Given the current home price growth rate, ultra low rates, unwillingness of the Fed to even raise rates 0.25% at a time, and projections of maybe only a total of 0.5% in rate hikes this year, it is very likely the Fed is already on the verge of losing control of housing prices.  Given the terrible wage inflation, it could be argued the Fed has already lost control.   How can anyone afford to buy housing in a 5.5% annual growth environment when wages are only rising about 2% annually and have only risen 1-1.5% annually over the last 5 year period when home prices have spiked 5.5% annually.  Wages are about 4 years behind home prices.

In conclusion I'd say Housing Bubble 2.0 is here, we are quite possibly nowhere near the top given the Fed reluctance to raise rates and central banks everywhere continuing to push QE in some form.  But more than likely in the next 2-3 years home prices will again be pulled down to the long term 3% trend line or below meaning home prices are currently over inflated by 15-25%.  How much bigger this bubble blows is yet to be determined,   But along with slowing manufacturing, falling corporate earnings, and NYSE margin debt at or near record levels, and other issues, add this to the list of indicators that things may not be as rosy as they seem, not that many really feel things are very rosy right now.