Is Another Housing Bubble Building?
Real Moneys Doug Kass takes aim at spiraling home prices and rising rents, and looks at what that means for real estate and homebuilder stocks. The price of housing has dominated financial news recently. For renters, the price of an average apartment takes up an ever-greater share of personal income every year. This is particularly true in big cities, where a one-bedroom apartment can often cost between $2,500 and $3,000. But the real headlines have been in the market for single-family housing. In many communities home prices have increased by between 30% and 50% in just the past two years. This has led median prices for a starter home over $280,000 nationwide, and to nearly $500,000 in the towns and suburbs near major cities. On Real Money, contributor Doug Kass takes a quick aim at spiraling home prices. We need more lower cost homes to ease the intense upward price pressures but we know how difficult it is right now to deliver enough of them. More than 10 years of underinvestment because of the Fed-induced housing boom and bust means we need a lot more homes, he writes. I have been warning that much higher home prices (and reduced affordability) would create a cyclical peak in residential real estate (homebuilder stocks have begun to roll over recently), Kass says. While theres no way of knowing, one warning sign is the ratio of house prices to incomes. Credit standards have remained tight, and banks havent weakened their standards on down payments. That isnt necessarily a good thing though. One of the biggest causes behind the housing crash of 2008 was the growing degree to which people struggled to keep up with their own mortgages in a highly overheated market that had sent prices climbing. As Kass points out in his diary, today prices arent just climbing, theyre soaring. Compared to 2008, buyers now have to spend more of their income keeping up with the minimum mortgage it takes to buy even a small house. They have to lay out more of their savings on the down payment. The ratio of house prices-to-household income is higher than it was going into the Great Recession. That isnt necessarily a warning sign. But it isnt good, either.