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Friday, February 5, 2016

The US Housing Bubble Has Been Fully Reflated

Last week, I came across this chart from Barry Ritholtz's BloombergView column "Confusion About the Financial Crisis Won't Die":


According to Barry Ritholtz:

"the ratio of home prices to income began to tick up in the early 2000s. By 2002, it was approaching its 1980s highs. It was a standard deviation away from the norm by 2004, and it reached at 2 1/2 times the norm in 2005. Housing, as a few of us observed long before the financial crisis bloomed, was a debacle about to happen.
 The housing boom drove employment in construction, mortgage brokerage, home furnishings and durable goods. We even had a bull market in real-estate agents. People pulled cash out of their homes at furious rates to fund renovations at first, then big-screen televisions, automobiles and vacations. The broader way to understand this is that wages were stagnant, inflation was starting to rise and rather than accept a drop in living standards, people used home equity to maintain consumption."

I noticed that the chart from Ned Davis Research only covered the period from 1977 to 2010. Home Prices, as indicated by the S&P/Case-Shiller 20-City Composite Home Price Index, have increased substantially since then.

So what does an updated version of the Ned Davis Research Chart look like right now? It looks like this:

The ratio of Median New Home Prices to Median Household Income has surpassed the highs of the last housing bubble and is once again more than two standard deviations above the norm - clearly unsustainable.  Housing is once again a debacle waiting to happen.

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