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Point by point critique (only US market being discussed here):
1. Prices: Article observes that prices have been going up, and that the increase has slowed in recent months/years. Article argues that this is reason to be bullish. However, the exact same thing was true in 2006, and the exact same argument could have been made. And we all know that it would have been wrong.
2. Equity - 90% of all mortgaged properties now have equity. Article argues that this is another reason to be bullish - however, it is so tightly related to #1 that it is scarcely a separate reason for thinking anything.
3. Loans. First, it is observed that the number of loans originated to new buyers has increased dramatically, and it is argued that this is a reason to be bullish on housing. However, the same was true in 2004-2006, in fact, and though the exact same argument could have been made then, it would have been wrong, obviously. the originations then were in the 600's to 800's (in billions) per quarter. By contrast, originations in recent quarters (in fact, in all quarters since 2008) have been in the 200s - 500s. In other words, the argument rests on the idea that an increased origination rate is a good sign, even though a more dramatically increased one, supposedly, isn't (or at least wasn't)! It should go without saying that this logic is questionable and needs more support. This isn't to say that it is necessarily wrong, but a more-than-cursory examination is needed.
Second, it is observed that just 1.4% of loans are in foreclosure, and it is argued that this is reason to be bullish. However, the article undermines itself by pointing out (by implying) that the rate was similar to this in 2007! One could argue that this isn't a good comparison because the 2007 situation was 1.4% and rising while the current situation is 1.4% and falling. However, this misses the fact that if the rate was at or below 1.4% at any point during the last housing bubble, then mathematically, it must have been <= 1.4% and falling at some point in the run-up! In other words, the exact same argument could have been made in the bubble, and it would have been wrong!
4. Construction. It is observed that new construction is sharply up, and it is argued that this is reason to be bullish. However, this was also true during the peak of the bubble - so the exact same argument could have been made, and would have been wrong.
5. Confidence. It is observed that confidence is sharply up, and it is argued that this is reason to be bullish. However, this was also true during the peak of the bubble - so the exact same argument could have been made, and would have been wrong.
6. Supply. It is observed that the current supply is only about 5 months, and argued that this is reason to be bullish. The problem here is that the supply (measured in months) was at current levels as recently as Autumn 2005. Again, the same argument could have been made then, and would've been wrong.
7. Consumer finances. It is argued that increased wages, retail spending, and net worth of American consumers bodes well for housing. Let's break this down:
Wages:
Based on the Case-Shiller Index, housing is still relatively highly valued after adjustment for inflation, compared to pre-bubble times such as the 1990's, and also compared to the very early 2000's. Even looking at the first couple years of the 2000's, which were still pre-bubble, real home prices were considerably lower than today (https://research.stlouisfed.org/fred2/series/SPCS20RSA) while real wages (expressed as household income since this is what represents the buying power for housing) were actually slightly higher at that time than they are now(The Median Household Income Rose in April - dshort - Advisor Perspectives). This means that wages do not really support prices as much now as in the pre-bubble very early 2000's.
Consumer retail spending:
The problem here is that the spending is only sustainable if it is supported by income. Thus this argument falls along with the one based on wages, because only sustainable spending, not transient spending, is relevant for a medium-to-long-term outlook on housing.
Net worth:
This largely is a result of asset prices (stocks and RE) having risen recently. However, the same was true in the bubble, and is true in bubbles in general. Hence it is improper to use it as a reason to be bullish.
When it comes to stocks, there is very little "momentum" in the stock price changes, thus to expect continued rises based on recent past is not good inference. Only short-term autocorrelation of stock returns is positive, as a statistically empirical fact, thus undermining the inference.
A note on Interest Rates (my addition):
It is the real interest rates, that is, those adjusted for inflation, not the nominal rates, that matter most. Low interest rates with low inflation are not really that impressive, and do not correlate with housing valuation. Also note that rates were at a multi-decade low in 2004, yet this was still a run-up to the big bubble, not an indication of healthy residential RE valuations.
It looks like your main objection is there are similarities to a period of time just prior to the previous busting of a real estate bubble but does that actually connect the two? No it doesn't really. More buyers is a good thing, builders building more is generally thought of as positive as it's implied they wouldn't build if they thought they couldn't sell. People who had foreclosures during the previous bust are now coming back online as buyers as well if they have managed their credit since their foreclosure.
I noticed in general you aren't pro owning so can you step out of your comfort zone and make a case for owning and a growing housing market?
The reason the market was in a bubble in the 2006 era was because the growth driving real estate prices was due to... growth in real estate prices.
Mortgage equity withdrawal was funding personal consumption and increased investment in housing to a degree we're not seeing today. Back then, cashed out equity was in the range of 5-8% of consumption expenditures, whereas now it's been consistently hovering around 0% or less. Meaning this time around the increase in house prices isn't having a wealth effect multiplier on the broader economy like it was in 2006. Once that multiplier went negative around 2007 there was no chance that house prices would level off, since leveling alone would cause a massive reduction in personal consumption. This time a leveling of prices could cause a slow down in some types of spending, but doubtful it's enough to cause a contraction.
This is pretty consistent with the last bubble - news media, economists and everyone else said housing is a 100% solid bet, that is shortly before it crashed and burned of course!! Most of these people have zero credibility, I would rather believe a palm reader.
I think the current housing bubble is a bit different...the speculation is the same and the end result will be the same, a devastating crash. Market crashes are about psychology and nothing else. Houses are not intrinsically worth the current asking prices in places like Southern California but rather they are worth that because someone "thinks" they are a good investment, the moment they think their money is better invested elsewhere the capital will flee to those assets and housing will just be collateral damage.
This is pretty consistent with the last bubble - news media, economists and everyone else said housing is a 100% solid bet, that is shortly before it crashed and burned of course!!
This isn't true. I remember plenty of speculation shortly before it crashed that the rapid rise in housing prices would hit a significant correction.
Krugman definitely claimed a correction was impending, and of course Paulson made a lot of money betting it would happen.
Point by point critique (only US market being discussed here):
1. Prices: Article observes that prices have been going up, and that the increase has slowed in recent months/years. Article argues that this is reason to be bullish. However, the exact same thing was true in 2006, and the exact same argument could have been made. And we all know that it would have been wrong.
2. Equity - 90% of all mortgaged properties now have equity. Article argues that this is another reason to be bullish - however, it is so tightly related to #1 that it is scarcely a separate reason for thinking anything.
3. Loans. First, it is observed that the number of loans originated to new buyers has increased dramatically, and it is argued that this is a reason to be bullish on housing. However, the same was true in 2004-2006, in fact, and though the exact same argument could have been made then, it would have been wrong, obviously. the originations then were in the 600's to 800's (in billions) per quarter. By contrast, originations in recent quarters (in fact, in all quarters since 2008) have been in the 200s - 500s. In other words, the argument rests on the idea that an increased origination rate is a good sign, even though a more dramatically increased one, supposedly, isn't (or at least wasn't)! It should go without saying that this logic is questionable and needs more support. This isn't to say that it is necessarily wrong, but a more-than-cursory examination is needed.
Second, it is observed that just 1.4% of loans are in foreclosure, and it is argued that this is reason to be bullish. However, the article undermines itself by pointing out (by implying) that the rate was similar to this in 2007! One could argue that this isn't a good comparison because the 2007 situation was 1.4% and rising while the current situation is 1.4% and falling. However, this misses the fact that if the rate was at or below 1.4% at any point during the last housing bubble, then mathematically, it must have been <= 1.4% and falling at some point in the run-up! In other words, the exact same argument could have been made in the bubble, and it would have been wrong!
4. Construction. It is observed that new construction is sharply up, and it is argued that this is reason to be bullish. However, this was also true during the peak of the bubble - so the exact same argument could have been made, and would have been wrong.
5. Confidence. It is observed that confidence is sharply up, and it is argued that this is reason to be bullish. However, this was also true during the peak of the bubble - so the exact same argument could have been made, and would have been wrong.
6. Supply. It is observed that the current supply is only about 5 months, and argued that this is reason to be bullish. The problem here is that the supply (measured in months) was at current levels as recently as Autumn 2005. Again, the same argument could have been made then, and would've been wrong.
7. Consumer finances. It is argued that increased wages, retail spending, and net worth of American consumers bodes well for housing. Let's break this down:
Wages:
Based on the Case-Shiller Index, housing is still relatively highly valued after adjustment for inflation, compared to pre-bubble times such as the 1990's, and also compared to the very early 2000's. Even looking at the first couple years of the 2000's, which were still pre-bubble, real home prices were considerably lower than today (https://research.stlouisfed.org/fred2/series/SPCS20RSA) while real wages (expressed as household income since this is what represents the buying power for housing) were actually slightly higher at that time than they are now(The Median Household Income Rose in April - dshort - Advisor Perspectives). This means that wages do not really support prices as much now as in the pre-bubble very early 2000's.
Consumer retail spending:
The problem here is that the spending is only sustainable if it is supported by income. Thus this argument falls along with the one based on wages, because only sustainable spending, not transient spending, is relevant for a medium-to-long-term outlook on housing.
Net worth:
This largely is a result of asset prices (stocks and RE) having risen recently. However, the same was true in the bubble, and is true in bubbles in general. Hence it is improper to use it as a reason to be bullish.
When it comes to stocks, there is very little "momentum" in the stock price changes, thus to expect continued rises based on recent past is not good inference. Only short-term autocorrelation of stock returns is positive, as a statistically empirical fact, thus undermining the inference.
A note on Interest Rates (my addition):
It is the real interest rates, that is, those adjusted for inflation, not the nominal rates, that matter most. Low interest rates with low inflation are not really that impressive, and do not correlate with housing valuation. Also note that rates were at a multi-decade low in 2004, yet this was still a run-up to the big bubble, not an indication of healthy residential RE valuations.
In a nutshell, you disagree with the article because you favor renting over buying, and collect the excuses to "prove" your prejudices are correct.
Watching the RE market before and through the 2006 turning, the increase in RE prices in certain states was due to no credit limitations. People were buying new home contracts 10 at a time, and the contract would be flipped, sometimes 3-4 times before closing. Te inflation was due to market exuberance, not underlying market demands. December of 2006, the bust hit. No more bigger fools.
Now there are problems, especially in the San Francisco/Silicon Valley area, as housing is way overpriced. But some of the increases in 'average' sales prices does not take into consideration underlying factors,such as a decline in availability of lower priced ousting in the market which pushes up the average price, a decline in foreclosed properties, again pushing up the average, etc.
Watching the RE market before and through the 2006 turning, the increase in RE prices in certain states was due to no credit limitations. People were buying new home contracts 10 at a time, and the contract would be flipped, sometimes 3-4 times before closing. Te inflation was due to market exuberance, not underlying market demands. December of 2006, the bust hit. No more bigger fools.
Now there are problems, especially in the San Francisco/Silicon Valley area, as housing is way overpriced. But some of the increases in 'average' sales prices does not take into consideration underlying factors,such as a decline in availability of lower priced ousting in the market which pushes up the average price, a decline in foreclosed properties, again pushing up the average, etc.
This post is spot on. More than anything else the liar-loan availability to specuvestors in in early to mid 2000s inflated the housing market way beyond fundamentals. In Phoenix you could buy plenty of foreclosures as following: 1 specuvestor purchased 10 homes, all with stated-income loans showing "owner-occupied". Whoever approved these loans was a criminal. On the way up these loans dried up inventory and then at the first problem the specuvestor let go off all of the homes, massively inflating inventory.
Now there is nothing like this going on. This makes all the difference in the world. There is no comparison between now and 2006. Regulation works if it is enforced.
It looks like your main objection is there are similarities to a period of time just prior to the previous busting of a real estate bubble but does that actually connect the two? No it doesn't really. More buyers is a good thing, builders building more is generally thought of as positive as it's implied they wouldn't build if they thought they couldn't sell. People who had foreclosures during the previous bust are now coming back online as buyers as well if they have managed their credit since their foreclosure.
I noticed in general you aren't pro owning so can you step out of your comfort zone and make a case for owning and a growing housing market?
First off, I am not trying to argue that we are in a big bubble now, merely that the points in the article don't do a good job of arguing that we are not. I think a much better argument would be to look at the relation between construction costs and home prices, especially if one can argue that lot/land prices are not at unsustainable levels, or don't make up too large a fraction of the construction cost. But secondarily, there is a distinction between rational expectations and mania, and merely pointing out that there are expectations of price increases doesn't tell you which of the two it is. Of course, in a sense, all of this is (partially) moot since no one ever buys the national average house (just like no one has 2.4 kids), and all real estate is local.
I can certainly argue that in typical low-cost areas where lots are cheap, housing is probably not overvalued because the square footages are almost double those of 50-70 years ago, which is enough to explain the increase in real prices.
In a nutshell, you disagree with the article because you favor renting over buying, and collect the excuses to "prove" your prejudices are correct.
This is an appeal to motivation fallacy and does not address the points.
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