U.S. Housing Bubbles

Looking back at the last 150 years of the US Housing market, it has had a consistent pattern of about every year 18 years peaking real estate sales and prices followed by declines. This coincides to real estate construction peaks driven by land speculation encouraged by the banks and fiscal policy with inappropriate credit creation.


In 2001, I first noticed the most recent housing bubble, but did not predict it would grow so big and last so long. In the summer of 2005 the market activity peaked, but home prices continued to rise for another year. Inventories were rising in 2006, yet prices continued to rise.

Housing bubbles can be caused by many factors. Some include speculative fever, historically low interest rates, lax lending standards, tax policies (such as exemptions of housing from capital gains), and failure of regulators to intervene among others. Bubbles in certain markets can be caused by bubbles in other markets. The fiscal policies to stimulate the economy after the 90s dot-com bubble had the Fed drop interest rates to a low 1% flooding the U.S. economy with cheap money, with much of it ending up in the real estate market.

House Under Water

Already again, starting in 2012, a new housing bubble is forming in the western United States, especially in California. However, in most markets I predict the rapid appreciation seen since 2012 will slow. One indicator of housing value is the price-to-rent ratio. Measuring the cost to rent versus the cost to own, this ratio indicates the demand overall for housing. Pre-bubbles the price of housing is much higher than the price to rent, showing that the demand for shelter is not in fact rising at the rates home prices are rising. Currently the price-to-rent ratio is near its long-term average, which should result in lower price appreciation. The Fed talking about raising interest rates, yet the devaluation of the Chinese currency and the credit problems in Europe are some of the many competing factors in the Fed’s mind.

Current homeownership rates are also near their long-term average of 65%. In the past the government felt that there was not such a thing as too much homeownership. Now with the recent lessens of the dangers of pushing homeownership to quickly, one would think that a more moderate approach will be taken going forward. Housing wealth (value of all homes in U.S.) to GDP has historically averaged about 1.4 times the GDP, it has recently returned to this ratio. Another indicator that the real estate appreciation will slow, is that investor activity has slowed with one indicator being the recent decline of cash buyers in most of the biggest metropolitan areas.

We are all influenced by the real estate market. Please write me with your comments, ideas, questions, concerns, solutions, and more. One of the main things the largest housing bubble in the history of the United States has taught us is that citizens can’t watch from the sidelines and hope that financial institutions and the government is correctly regulating the market. We all need to have our eye on the pulse as the repercussions are too great to let it happen again!

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