Bursting bubbles

The housing market is looking better. In some places it is downright hot.

In November, CoreLogic, a firm specializing in real estate analysis, said home prices had reached an annual growth rate of 12 percent in September. That’s the fastest year-over-year growth rate since 2006. In Atlanta, Phoenix, and other cities hit hard by the housing bust, the rise was even greater. Nevada posted 25 percent year-over-year growth.

That’s good news if you’re already a homeowner, especially if you’ve been “underwater” and owe more on your home than it’s worth. But there’s other news. The same CoreLogic survey announcing the strong annual growth said September slowed dramatically, to 0.2 percent. We’ve also seen some evidence that the homebuyers of recent years are speculators who are bidding up the price of homes on the theory that others will come in after them and bid prices up still more. In Las Vegas, for example, 58 percent of all September home purchases were cash purchases, with no mortgages being recorded. Almost all of these were investors looking to “flip” the houses or put them into rental inventories.

So do these troubling trends mean we’re headed for another housing bubble? No, says Dan Greenhaus, chief strategist for BTIG. Greenhaus acknowledges the speculation. “Clearly there’s been an influx of investors,” he said. He also acknowledges that housing prices have stalled a bit in recent months, largely due to rising interest rates. But he says the more important measure is price-to-income. Historically, Americans bought homes that were about 3.2 times their annual income. A family with a $75,000 income would buy a home worth between $200,000 and $250,000. The price-to-income ratio peaked in 2005 at 4.3. The family with a $75,000 income was buying a home priced at $322,500. One reason Greenhaus believes we’re not in a bubble: That ratio today is about 3.0, below the historical average.

Supporting Greenhaus is a study by Yale economist Robert Shiller. He charts home prices going back to the 1890s and finds that “real home prices,” prices adjusted for inflation, are at historical averages. Since the size of homes has grown tremendously in the past 30 years, the price per square foot of new homes is approaching record lows.

Greenhaus does not give the economy a clean bill of health. “We’ve got employment issues, continuing problems in Washington. I’ll grant that we’ve got issues to deal with,” he said. But when it comes to bubbles, he’s not convinced. “The only bubble we’re in is a bubble in the use of the word bubble.”