Home prices have been rising across the nation, in some places by a factor of three times the rate of inflation. The market looks similar to 2006, just before the housing crash, says CityLab writer Kriston Capps. Though, Capps says there are key differences between the housing peak in 2006 and the housing peak today. He explains:
This surge in housing prices is not necessarily evidence for a bubble—much less any indication that a bubble is about to burst. Understanding the difference is critical to knowing how high housing costs may affect the economy going forward. Late in July, the S&P CoreLogic Case–Shiller U.S. National Home Price NSA Index tracked a 6.4 percent annual gain in home prices for May 2018. This index has recorded year-over-year increases of at least 5 percent every month since August 2016—a sign of the strength of the recovery.
But since most workers aren’t earning 6 percent raises year after year, eventually this party has to come to an end. (Indeed, for four-fifths of privately employed workers, wages are actually falling.) Housing prices will stabilize or soften because they have nowhere else to go. The prevailing trend is unsustainable. “If something can’t go on forever, sooner or later it will end,” says David Blitzer, managing director for S&P Dow Jones Indices. With mortgage rates and prices rising, sales in both new homes and existing homes are starting to slow. “Either buyers have gone for the summer, because it’s too hot to look at housing, or they’re pausing to see what’s going on,” Blitzer says. “If the pause continues, you’ll see sales go down.”
One big difference is in the relative dearth of banditry today. Speculators aren’t driving new home construction during the recovery the way that they did during the boom. Researchers from Chinese University of Hong Kong, Princeton University, and the University of Texas at Austin have shown (in an as-yet-unpublished paper) the economic consequences of betting on the housing market: Cities with a higher share of investment homes saw higher highs (and lower lows).Read More