Stocks may be expensive based on historical measures, but it’s nothing compared to skyrocketing home values says Robert Shiller.
Please consider Home Prices Are In a Bubble. Full Stop.
Consider that the Case-Shiller National Home Price index has gained in excess of 6% per year on average since January 2012, while net rental income has barely kept up with inflation, increasing just less than 2% per year. The result is that home prices seem as overvalued as they were in the spring of 2005, nine months before the peak.
One way to measure home valuations is with a cyclically adjusted price to earnings (CAPE) ratio developed by Yale University professor and Nobel Laureate Robert Shiller for stocks. The concept can be applied to a broad swath of assets by dividing the current price of an asset by the average annual inflation-adjusted earnings over the prior 10 years. The chart above shows CAPE for U.S. home prices and the S&P 500 Index since 1996.
The bad news is all previous history came at higher mortgage rates. The average 30-year fixed mortgage rate fell below 3% for the first time in August 2020, and rates are close to the lowest possible levels given the credit risk and costs of writing mortgages. It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernable upside.
Median Household Income vs Case Shiller Home Prices
Shiller compared home prices to stocks based on CAPE. To compute the CAPE for housing he used rent.
My chart looks at household income vs the Case-Shiller Home Price Index. Both indexes have a base year of 2000.
Household income is annual and the latest year available is 2019. I used Case-Shiller quarterly data.
Since 2000, median household income is up about 64%. Home prices are up 118%.
Robert Shiller calls this a bubble and so do I.
Correction
I accidently posted a chart of real income vs nominal home prices.
The corrected chart shows nominal household income vs home prices.
Mish
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NOTHING close to what happened in 2004/5/6………….phoenix market went up 40% in like 2 years back then, and liar loans put morons under water fast. the bubble is our empire of idiots. real estate is fine unless folks are under water.
Wow, going back to your roots Mish good Idea. Made enough to keep me retire in 2005 sold all my RE. After Biden has a chance to change things RE will fall not one doubt about it. I’ve got my powder loaded. Once he raises Corp rates you can flush those jobs right to COMMUNIST CHINA. When will liberals ever learn?
For gosh sakes go hide in your closet. This virus doesn’t hurt most people unless they have other problems or are old with immune system problems . Stop whining or go after China for creating it. A mask won’t save you just look at CA. Suck it up buttercup.
A better picture would be the Ratio between the housing price index and the median household income. It looks like today’s ratio is still below that of last bubble. With today’s historical low mortgage rate, I’d expect this ratio to also reach historical high. Affordability today has not reached historical low yet.
If you want to be banned – It’s easy. Make a comment like this :
“WTF, Is this MSNBC, or CNN. Must have fat fingered the wrong bookmark. I was looking for an objective financial/economic blog. Not some “orange man bad” hit farm political pundit site.”
What a pleasant breath of fresh air after a year of political drama hate on the Thump. It is strange you don’t give some corrective advice to the incoming administration. I can’t see any policy coming that won’t jump the bubbles even more.
Playing devil’s advocate here. Popping these bubbles would be bad for the American and global economy. This is precisely why it cannot happen. More money is coming in from China than ever before into North American real estate. The stock market is also rife with speculation but has a floor because of the amount automatic trading that goes on. For that reason, I think it is stock market that is driving the real estate market. I think a larger percentage of the global economy and US economy is based on stock trading than people think. It has only gone up during the pandemic.
Is there any evidence that the stock market is responsible for keeping housing prices high ?
according to cr, there is no bubble in housing. there is no bubble in stocks either, although there is some over leverage. For something to be in a bubble, there has to be rampant speculation.
With Biden coming into office, housing values can go down when good neighborhoods get transformed into Section 8 Bidenvilles.
You Mean The “Drumpf”-Villes or Homeless Enclaves This Culero currently in office has created with his Multi-Trillion Dollar Big Business Giveaway and Trillion Dollar Deficit.
You’re Too Poor To Be Affected Positively By his Giveaway, And Yet You Support Him, What a Verga You ARE!!!
The Feds are not going to change state and local policies concerning housing and zoning. Stop posting like a troll, SmokeyIX.
There’s a higher preference for homes than securities. One cannot live in a stock certificate or brokerage account.
a stock certificate or brokerage account doesn’t have annual property taxes or maintenance costs.
House prices usually fall due to forced sellers, caused by unemployment. So far the furlough schemes etc have minimised it’s effects.
FWIW. Biden is putting the Obama military complex back together.
Biden announced his Department of Defense landing team on Tuesday. Of these 23 policy experts, one third have taken funding from arms manufacturers, according to a report published this week by Antiwar.com.
A knot of hawks
Leading the team is Kathleen Hicks, an undersecretary of defense in the Obama administration, and an employee of the Center for Strategic and International Studies (CSIS), a think tank funded by a host of NATO governments, oil firms, and weapons makers Northrop Grumman, Boeing, Lockheed Martin, Raytheon, and General Atomics. The latter firm produces the Predator drones used by the Obama administration to kill hundreds of civilians in at least four Middle-Eastern countries.
Hicks was a vocal opponent of President Donald Trump’s plan to withdraw a number of US troops from Germany, claiming in August that such a move “benefits our adversaries.”
Two other members of Biden’s Pentagon team, Andrew Hunter and Melissa Dalton, work for CSIS and served under Obama in the Defense Department.
RT ? GMAFB.
Hahahhaha – quoting RT as a source of news
Exactly. I think if RT is scared of it, then it must mean Russia and Putin are afraid of it. Trump ceded a lot of ground to Putin around the world and the obvious fear from the Kremlin is that the US will retake power and not cede wherever Putin wants the way Trump did.
The RE market in Las Vegas won’t fall until they let owners kick out people who aren’t paying their rent or until the owners go broke. You can’t keep on closing everything down and expect to keep jobs. Jobs go, so goes the housing market sooner or later. Biden will come to the rescue, destroying millions of jobs in the near future. Of course he will create a massive RE bubble. Maybe he can raise corp rates again so we can lose more jobs, gonna be a nice ride for me again. Locked and loaded, until then we’ll spend the next 6 months in the keys having fun.
The air will slowly seep out of the bubble, one boomer funereal at a time.
you are just another stupid lazy millennial. Once boomers are gone the u.s. will be just another shithole. good luck to you morom
Silly to conclude there is a house price bubble by comparing to rental rates. Of course house prices have gone up in comparison to rents as interest rates have fallen, as this makes houses more affordable and also allows investors to keep rents lower. This doesn’t mean there is a house price bubble that will pop. What will cause house prices to fall?
US Housing affordablilty index does not indicate a bubble.
California housing affordability index also does not indicate a bubble – the index peaked back oin 2012.
https://www.statista.com/statistics/201568/change-in-the-composite-us-housing-affordability-index-since-1975/#:~:text=Composite%20housing%20affordability%20index%20in%20the%20U.S.%202000%2D2019&text=The%20composite%20Housing%20Affordability%20Index,the%20historical%20norm%20of%20128.
It’s a Fed supported bubble. It isnt going to deflate. This one of actually propping up assets to save pensions, 401ks and bondholders.
How will they keep it going as more and more people are priced out?
By appling more and more QE, that’s how.
negative mortgage interest rates might do the job….insanity has no limits.. Here in Belgium big banks offering loans below 1% for 20 years, construction is booming like never before!
You dont need buyers to have high prices. Just look at some if highest priced real estate in the world in cities like Sydney or Vancouver.
There’s an easy way to lower payments: 40 and 50 year mortgages are coming. Auto loans terms haver been growing longer for some time now. It won’t be long before mortgages follow suit to maintain “affordabiity”.
I have a simple policy.
When I make an error I issue a correction and an apology if the error is big enough.
You definitely do NOT issues corrections to you errors. You have repeatedly said Venezuela’s problems are due to socialist despite the incontrovertible fact her problems are due to American’s illegal declaration of war and economic blockaids.
I would put you wrong at close to 99% (p=0.05).
Do the right thing. It will gratify some people and astonish the rest.—- Mark Twain
exellent post….just like japan in 1989, when both RE and stocks were bubbles together…if u add both bubbles, it is 75 (2000), 70 (2006) and 75 now (2020)….probably nothing
“Since 2000, real median household income is up about 10%. Home prices are up 118%.”
Mish, you can’t mix real and nominal values when making a comparison. Either use all nominal or all real indicators.
Yes, thanks
an inadvertent error. The nominal chart also shows the bubble as well as when the disconnect happened.
Would a bubble in money supply or expansion of money/credit be able to negate the bubble aspect? As in all things going up together. AKA inflation. Genuine question from a novice just trying not to loose his nest egg.
Wealth effect for housing tends to be higher than that for stocks.
Stripping out that positive impact makes recent economic performance look even more anaemic.
It’s all an illusion and when reality hits, unwind occurs, the shock will be massive.
Just like last time. . . wait.
Wealth effect for housing is forceful. Lets hope it doesn’t go into reverse with the other negative forces currently at work.
All points to even lower rates and bigger bubbles to keep the show on the road until some event kicks off a series of historic collapses across a spectrum of assets.
Higher and higher systemic fragility, sensible to get out of the system/market.
Especially asset classes that have no claim on anything of tangible value.
The only thing stock investors have to protect them in a bad crash is their own ability to get out ahead of the crowd. This is not true of RE.
In 2009, for instance, rents in this area never dropped at all. My cash flow was not affected, and although RE prices took a hit, it was a buying opportunity for us, and we were able to buy some additional properties that also have had steady, decent cash flow…..as well as serious price appreciation over a decade.
The 1031 exchange provision of the income tax code , as long as that perk persists, also helps make growing a real estate portfolio an excellent strategy….with additional benefits for one’s heirs at the end of life.
I dont think real estate will come down as long as we keep interest rates below the inflation rate, we might see some slowing but at any such juncture the Fed will come to the rescue. Its a different world now with the Fed in charge printing trillions left and right.
More likely to become an even bigger disconnect, just delay the inevitable that will be a bigger collapse.
this analysis passes the smell test, too. the r/e cycles are long, but clear.
Using CAPE analysis for housing only makes sense if one were buying RE as a landlord. What the home could bring in as a rental is irrelevant to someone buying a home to live in.
As long as the growth of the housing stock does not exceed the growth of the buyer pool, prices should not decrease.
Pandemic unemployed barristas, waiters and Uber drivers were never in the buyer pool to begin with.
But if pandemic unemployment hits current mortgage holders who had sufficient income to have been able to save for the down and make their mortgage payments, these defaults will increase the housing stock. And if unemployment hits this wealthier buyer pool, demand for homes will decrease. The result of an increase in the housng stock and decrease in demand will result in prices decreasing. So watch UE trends in white collar jobs.
Certainly real estate is in a bubble. Real estate has boom and bust cycles. We’ve seen it our whole lives…
It’s still a tangible asset with some residual value in the worst market….In just about any scenario I can imagine, real estate is as good an asset to own (in this country, anyway, because of our tax structure) as anything else you could possibly invest in.
And…it becomes a better investment when you can couple a high value property with a high quality liability……like 30 year fixed interest mortgage money locked in at the lowest rates in a generation.
Like it is with most asset classes, making money in real estate requires exercising prudence.
In a system like ours, we deal with crashes when bubbles pop. Usually people make the mistake of using too much leverage to try to gain wealth quickly …..in RE, this is especially common.
But…in this environment…with helicopter money and QE both already happening and likely to happen some more…..I’d bet that the RE bubble gets a whole lot bigger before it pops. But it isn’t a monolithic market…..there are always locations that will be winners….and others that will be losers. It isn’t like stocks or bonds in that respect.
So….you can call it a bubble…I call it equity. To each his own.
The tax structure can change as when state and local tax deductions became capped on the Federal Tax Return. With interest rates so low, the mortgage deduction could also disappear. Europe does not allow mortgage interest to be deducted from income when figuring taxes, so US politicians could easily adopt that policy to increase taxes.
Easily??? If the mortgage interest deduction were in danger, you would hear a howl the likes of which you have never heard from the real estate agents, builders and home owners. This may be more “third rail” than Social Security. I can’t believe Trump nearly got away with saying he would end the payroll tax. I guess people are so dumb they didn’t realize that is the main funding source for Social Security.
I think people just ignored Trump’s comments as more hot air.
What will be more interesting is the gymnastics that they go through trying to re-ignite that dumpster fire.
Well we know someone is moving out: https://twitter.com/scotwilliams/status/1327551331800854529
Trump overuses the word greatest and for what Trump is trying to convey in this clip its the wrong word. Use despicable or insidious but not greatest. Greatest would be used for the best the most fantastic the most wonderful etc.
Definitely a bubble but the biggest bubble parts are localised on the coasts.
I’m not worried unless mortgage debt begins to exceed market value less an appropriate haircut. This only becomes a problem if mortgages become underwater
That’s actually not a very big “if” at all. The higher the valuation, the easier it is to be underwater.
Fear not! Judy Shelton to the rescue!
/sarc, I think?
Shelton will be confirmed to put a monkey wrench in Biden’s administration. Senate was not willing to confirm when it thought Trump would be president
Word on the street is she is committed to destroying the FED. Obviously as one of seven she can’t do it alone. Not even sure how she could present problems for the Biden Admin.
There is a substantial contingent of FED critics among the commenters here. I’m curious how this is perceived.
The Fed is doing a pretty good job of destroying the Fed already, in different ways.
I’m on a board. diversity of opinion is valuable but you also want a functioning team. this appointment is meant to gunk up the fed
If you listen to her interviews and read her work, she makes a lot of sense , way more than Bernank and Cie, I dont know why there is such animosity against her, maybe because she was nominated by Trump but so was Powell, I dont get it.
Weirdly, the Republican Senate held up her appointment until it became clear that Trump had lost. Why is she now acceptable?
Fear not, Judy Sheindlin to the rescue..
No, just pretend, and it isn’t.