Like a short decade ago, we are once again experiencing a record housing boom, considered to be among one of the greatest in United States history. Which begs the impossible to know questions: How long will it last and where is it going?
Since February 2012 marked the end of financial crisis-era price declines, prices for US homes have risen dramatically. Per the S&P/CoreLogic/Case-Shiller National Home Price Index, prices increased by 53% in comparison to the bottom of the market in 2012.
Thus a home valued at $200,000 in 2012 would be worth over $300,000 in September. Even considering the CPI or Consumer Price Index, real prices were up a substantial 40% in just seven years. This marks the strongest national boom in real terms since the CPI’s inception in 1913.
The largest boom in US history occurred from February 1997 to October 2006, which saw U.S real home prices increase by 74%. This era marked a popularity in mortgage-backed financial investments along with lax regulations. Flipping homes became popular and people exploited this boom by buying and selling homes for large profits in just a few months.
That boom ended and caused the Great Recession of 2008. Valuations plummeted by 35%. The second greatest boom, from 1942 to 1947, had a smaller impact on the economy, as this interval saw a 60% increase in real estate prices.
Booms and busts are famous in the eyes of the American public especially from a social-psychological standpoint.
Some signs of housing market weaknesses that parallel 2006 housing market weaknesses include declining amounts of permits and sales of both existing and new homes.
We cannot be sure what these metrics mean for the current market. Low interest rates caused by the central banks’ actions to save economies from depressions, are a popular reason behind this current boom. Every large housing boom in US history included low interest rates and cheap mortgages.
Another explanation is just economic growth. However, history has shown that prices of existing homes haven’t responded to economic growth. For example, the GDP increased 6 fold in 50 years with real prices increasing by 20% over the same time period.
A simple explanation for this is that the Great Recession is over and home prices are readjusting. This reason doesn’t seem accurate as prices were 11% higher than at the 2006 peak in nominal terms, and almost as high in real terms.
Presidents can greatly impact the housing markets as well. For example, former President Bush encouraged homeownership by signing the American Dream Downpayment Act, which subsidized home purchases. He even stated in his re-election that “We want more people owning their own home.”
It’s tough to pinpoint the Trump administration’s impact on housing. Mr. Trump wants to “Make America Great Again” but new tax law changes have been unfriendly to homeowners.
Even if the rates increased slightly, home prices can only increase so much. After all people must cover other living expenses and builders could be creating new offerings to compete with existing homes
These home prices could be a self-fulfilling prophecy. Per legendary economist John Maynard Keynes, in his classic publication “General Theory of Employment, Interest and Money,” people seem to have a “simple faith in the conventional basis of valuation.”
If the conventional basis is that home prices will increase by 5% annually, sellers would adjust their prices accordingly. On the other hand, buyers won’t feel like they are paying too much if they accept this trend. We may believe this trend is part of the “American dream.”
This housing boom can’t go on forever. The end can’t been seen, but home prices have been increasing at record rates.
When will the boom bust? Please tell us below!
Article By: Dalton Brewster