Home Prices Up, But Not to Bubble Levels

Another residential bubble is the last thing anyone needs.

It’s important to the rest of the economy—and certainly the commercial real estate market—that the residential real estate market not overheat again. Another residential bubble is the last thing anyone needs, but with housing prices reportedly reaching roughly same levels they were just before the mid-2000s bubble popped, does that mean the economy’s at risk of another bubble this soon? The short answer: no. Most of the metrics that report a return to bubble prices are dealing in nominal prices. While inflation hasn’t been very high in recent decades, there has been some inflation and home prices haven’t caught up.

The latest S&P/Case-Shiller U.S. National Home Price Index, which was released Tuesday, recorded a year-over-year gain of 4.9 percent this September, compared with a 4.6 percent annual increase in August (the indexes are for three months, and are published about a month and a half afterwards). The 10-City Composite increased 5 percent year-over-year in September, and the 20-City Composite’s year-over-year gain was 5.5 percent. Housing has been rising faster than inflation: After adjusting for the CPI core rate of inflation, the S&P/Case Shiller National Home Price Index rose 3 percent from last September to this September.

Even so, residential prices haven’t returned to mid-2000s levels yet, not in real terms. In nominal terms, the Case-Shiller National Index is back to August 2005 levels, which is close to peak, while Composite 20 Index is back to February 2005. In real terms, however, both indexes are closer to prices in 2002 or 2003. That’s relatively high by the standards of previous decades, but not vastly so, and certainly not the Matterhorn heights reached as supply expanded rapidly in the mid-2000s and mortgage money was freely available to buy all those houses. In the current market, a dearth of supply is squeezing prices upward, but not to dangerous heights.

Another bit of good news, also reported on Tuesday: the U.S. economy increased at an annual rate of 2.1 percent in the third quarter of 2015, according to the second estimate for the quarter released by the Bureau of Economic Analysis. That isn’t as much as in 2Q 2015, when real GDP increased 3.9 percent, but it’s more than the previous estimate of 1.5 percent. As these estimates generally go, it will probably be revised upward again when the final numbers come out next month. All in all, it’s another bit of data that might encourage an interest rate hike in a few weeks.