Another Housing Bubble is Starting

[Beet]

Prices are now appreciating at the same rate as they were at the height of the bubble. This is the problem with Bernanke's QE forever plan...

[Beet]

I'd say erratic shifts in housing prices are an independent "bad" apart from the credit risk (e.g., finance) component. At the most basic level, housing is a requirement for living. Particularly owning a single-family house is both the best financial decision for a family that lives in the same metropolis for more than 15 years or so, and a virtual requirement to be accepted as truly middle class. Housing should be affordable.

Yes, it's true, that when interest rates come down, a person making $60k in salary can afford to borrow a much larger amount of money than when interest rates are higher based on monthly payment. However, the total amount of debt the person is in is higher. The payment may be the same but you are paying for it much longer than before. Hence, over the entire lifecycle, lower interest rates do not help homebuyers. In fact, it hurts them because the market reacts to the lower interest rate by adjusting up the price.

Since most non-homeowners have much less wealth than most homeowners, this is effectively a very large regressive tax or even a transfer of wealth from the poor to the rich. It is also a transfer of wealth from the young to the old. Given that we're already transferring wealth from the young to the old through the federal budget deficit to fund Social Security & Medicare, in the private sector when companies pay younger workers less so they can support legacy pension promises to older workers, and rising tuition costs in university, it's another body blow to the future independence of today's young people. The long term effect will be to further infantilize young people, who will continue to be dependent on their parents financially into adulthood or even live at home well into adulthood. Young people will be blamed as a "generation of slackers", but it's really the policies that baby boomers have enacted that has made these trends the logical response.

Of course homeowners who are 64% of households will feel good if housing prices are rising, and this will encourage them to spend and borrow more. However, it should be pointed out that unless these people are flipping houses, the price rise does not actually benefit them at all. The house one lives in does not automatically become 'better' just because it's said to be worth more. In fact the main practical effect may be a property tax increase.

Finally it should be noted that high housing prices are not an easily reversed policy, as we have seen. Once housing prices get to astronomical levels, no policymaker in the world has ever been able to lower it without causing massive damage. We should be especially wary of going down a path we cannot easily return from...

[Beet]

As glad as I am about seeing an economic recovery that is finally starting to gain steam, I do not want to see it based on housing, credit, and consumption like the last time.  We need an economic recovery based more on manufacturing exports, savings, and investment.    

and to do that, we need growth based on innovation, not speculation. This is the basic policy differences between the parties when it comes to growth.

The Democrats turned a blind eye to the housing bubble too. Sadly, at this point it's not at all clear that they would do differently if it happened again.

[Beet]

Brought these numbers up in my Intro to Econ class as the Case-Shiller Index and got shot down by the prof. Oops.

The change is less dramatic if you look at Case-Shiller numbers, what are the methodological differences between the two? Which one is more reliable?

Sorry about that. Zillow is a website for homebuyers that was founded during the last housing boom. Its data comes only from its database. Case-Shiller index has been around longer and is associated with housing expert Robert Shiller, and comes from a survey conducted by S&P. So it's more reputable. But the two surveys try to measure the same thing. Here's a bit of description from Zillow:

"One important difference between the Zillow Home Value Index and the Case-Shiller index is their respective coverage areas. The Zillow Home Value Index is reported for 165 metropolitan areas whereas Case-Shiller reports on 20 higher level metropolitan areas (although the national Case-Shiller index uses data from about 100 metropolitan areas)."

However I'm not sure how much less dramatic the Case-Shiller numbers are? The chart shows Zillow YoY increase of 4.7%, whereas the WSJ reports that Case-Shiller YoY increase is 3.6%, " the strongest rise since 2005". Perhaps that's a big difference for your professor, or perhaps your professor means the YoY is a lot less dramatic than the MoM.

[Beet]

DeadFlagBlues' professor is probably thinking about YoY changes. The last month's MoM change on Zillow is the same as the MoM change from the height as the housing boom, however that is just for one month. To have a real housing bubble we would have to see it consistently at this level month after month. At the height of the bubble a 1% MoM gain meant 12% annual gains for the national market. So at 3-5% annual gains for 2012, and even with higher 7-9% annual gain projections for 2013, we are significantly short of that.