Ronald Regan’s former budget director, David Stockman, declares the recent turnaround in the housing market as bubble 2.0. He cites as an example markets like Phoenix where prices have risen 20% . I disagree and see this as a bounce off the bottom where prices got so cheap that there was finally a recovery. Investors saw they could achieve a better yield buying and renting homes than they could on other assets including apartment buildings. In Phoenix where prices had fallen 70%, prices would have to rise over 300% to get back to the peak. A 20% increase, after a 70% fall, is far from a bubble. Phoenix housing prices are only at pre-housing boom 2002 levels, according to Zillow. The housing bubble was caused by lenders giving a 100% financing to first time buyers who speculated on prices increasing. Now it is difficult to get loans except for the most credit worthy, and substantial down payments are required. Today’s first time home buyers are the most credit worthy and find the economics and lifestyle benefits just too compelling to rent. As the economy recovers, households are forming, but many are moving into rental housing.
The most fundamental sign of a bubble is a disparity between the cost of owning versus renting. The greater the cost of owning versus renting, the greater the bubble. During the bubble, the disparity was at its largest in recent history. Now it is either normal or unusually low.
The current recovery may not be a boom but it is not a bubble. Yes historically low interest rates are pushing up all asset values, but at least with housing in certain areas, values are far below peak and their long run statistical trend. You can read David Stockman’s arguments in the article below.