Are We Really in a Housing Bubble?

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Are we in yet another housing bubble? The Case-Shiller chart I posted yesterday suggests we probably are: housing prices may not be at their previous 2006 peak, but they’re nonetheless far higher than their historical average.

But wait. What about interest rates? Low interest rates mean lower monthly payments even if purchase prices are relatively high, and that’s what really matters since that’s what people actually pay. This is all true enough, but it raises a question: how low are mortgage rates? That is, real mortgage rates, which are adjusted for inflation. This low:

Historically, the average real 30-year fixed mortgage rate is a hair above 4 percent. Right now it’s at 3.5 percent. In other words, mortgage rates aren’t really all that low. This suggest that historically high home prices also mean historically high mortgage payments.

But there are other ways of looking at this. For example, total mortgage debt as a percent of GDP has retreated to 2002 levels and isn’t rising. Mortgage debt service as a percent of household income is low and declining. Both of these are good signs.

On the other hand, these are aggregate numbers that include everyone with a mortgage. It would be better if we could see them just for new buyers, but I don’t know where to find that. And if you look at the price-to-rent ratio, which is usually a good harbinger of housing bubbles, it’s been rising since 2012 and is now at 2004 levels. That’s not so good, and if we get to 2005 levels we should start being scared.

As usual, there are a lot of ways of looking at this, which is why different people will give you firm but very different opinions about home prices. Personally, I think the evidence suggests we’re in another bubble. But I might be wrong.

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

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As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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