House prices are creeping toward bubble territory again
A decade ago, a bubble in house prices led to the worst financial crisis since the Great Depression.
House prices then collapsed, falling below their long-term trend.
In recent years, however, as the economy has recovered, so have house prices. And while they are still a long way from their 2005-2007 bubble peak, they're also now once again far above their long-term average.
There are two common valuation metrics with which to measure house prices: Price-to-income and price-to-rent.
The chart below from Jeremy Grantham of GMO shows price-to-income for the past 40 years.
As you can see, for the last quarter of the 20th Century, price-to-incomes remained in a narrow band. Then they blasted off to bubble land. Now, in an "echo bubble," they're climbing well above average again.
Here's Grantham:
The U.S. housing market, although well below 2006 highs, is nonetheless approaching a one and onehalf-sigma level based on its previous history. Given the intensity of the pain we felt so recently, we might expect that such a bubble would be psychologically impossible, but the data in Exhibit 1 speaks for itself. This is a classic echo bubble - i.e., driven partly by the feeling that the substantially higher prices in 2006 (with its three-sigma bubble) somehow justify today's merely one and one-half-sigma prices. Prices have been rising rapidly recently and at this rate will reach one and three-quarterssigma this summer. Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices - much more dangerous than inflated stock prices in my opinion - might beat the U.S. equity market in the race to cause the next financial crisis.
As the chart above suggests, the price level at any given point in time tells you almost nothing about what prices will do next. But over the long run...
- US buys 81 Soviet-era combat aircraft from Russia's ally costing on average less than $20,000 each, report says
- 2 states where home prices are falling because there are too many houses and not enough buyers
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- Foreign tourist arrivals in India will cross pre-pandemic level in 2024
- Upcoming smartphones launching in India in May 2024
- Markets rebound in early trade amid global rally, buying in ICICI Bank and Reliance
- Women in Leadership
- Rupee declines 5 paise to 83.43 against US dollar in early trade
- JNK India IPO allotment date
- JioCinema New Plans
- Realme Narzo 70 Launched
- Apple Let Loose event
- Elon Musk Apology
- RIL cash flows
- Charlie Munger
- Feedbank IPO allotment
- Tata IPO allotment
- Most generous retirement plans
- Broadcom lays off
- Cibil Score vs Cibil Report
- Birla and Bajaj in top Richest
- Nestle Sept 2023 report
- India Equity Market