Readers Weigh in on the Housing Bubble

by | Nov 18, 2005 | Weekly Column

A recent column, “The Housing Bubble That Wasn’t,” struck a real nerve with readers, who shared some thoughtful comments via email and my weblog. In that column I compared today’s housing prices, adjusted for inflation, to those in 1950. Viewed with that perspective, today’s prices don’t seem all that high.

One South Dakota reader called my numbers “selective statistics from organizations with a vested interest in the status quo…” There could certainly be some truth in the assumption that one source of those statistics, The National Association of Home Builders, would have a bias toward suggesting today’s prices are not high. However, that source was balanced by others such as the National Bureau of Economic Research, the US Bureau of Labor Statistics, and the US Census Bureau. None of those organizations would have any reason to be biased one way or another about the question of whether we are in a housing bubble.

Amy Hall, Rapid City, SD, wrote to question, "…whether or not 1950 is a good benchmark. I’m just wondering if 1950 was a time of great prosperity and if maybe prices were out of proportion then compared with other decades." Amy’s question was essentially repeated by another reader, Jeff Grimm, Portland, OR. He wrote, "I don’t believe the average household is willing to live as frugally as our parents did in the 50s, which puts a lot more demands on the income."

They raised a valid point. Comparing 1950 and today is essentially laying two snapshots side by side. That’s a much different scenario than doing a year-by-year comparison over a period of time, which would provide a much more complete history of housing prices as well as other related factors.

The South Dakota reader quoted earlier also brought up another significant factor that the numbers I cited did not address. “One needs to ask if in 1950 were there no-money-down interest-only mortgages? What were the bankruptcy rates? Home equity loans?" He rightly draws a parallel that there is a correlation between housing prices and the ease of obtaining mortgage financing.

Certainly, it would appear to me that mortgage debt is far easier to obtain now than it was in 1950, which adds credibility to the point he made. There is no doubt that as mortgage interest rates rise and lenders start requiring higher equity contributions, housing prices will start to cool. The question is whether they will cool or go into a deep freeze.

In the June edition of Research Reports, the American Institute for Economic Research found the major culprit in recent housing increases to be land prices, not structures. They suggest that the increase in land prices is not surprising when we consider our increasing population, more restrictive zoning, and environmental regulations.

They also point out that the increases in housing prices are very regional. Indeed, I have suspected that housing costs on both the East and West Coasts will adjust more severely than housing costs in “flyover” country. Statistics from the Federal Housing Finance Board suggest that since 1999, the consumer price index increased 13.1% while the average cost of a home increased 39.9%. There are 38 states that have seen housing prices increase at a rate higher than the CPI. That leaves 12 states that haven’t even kept up with inflation. (South Dakota, at 16.7%, was 31st on the list of home price increases—more proof that we aren’t last in everything!)

I remain unchanged in my overall assessment that housing prices will stagnate, even slump in some areas, but a crash is not in the cards. I do appreciate everyone who took the time to share your insightful comments.

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