Is The Housing Bubble Back?

The Housing Market Roars Back to Life

2006 was a seemingly pleasant time for America. Sprawling subdivisions were popping up all over the country, home prices were surging and homebuyers were grabbing up properties at record rates with little to no money set aside for down payments. It seemed that prices would never stop climbing and that wealth would never stop growing.

Then came 2007 / 2008 and everything collapsed. Home prices plummeted, people found themselves owing more than their homes were worth and we were faced with nearly countless foreclosures. Neighborhoods stood abandoned; new subdivisions stopped mid-construction and America decided that we would never create another housing bubble again.

Welcome to 2014

For the past three years, housing has been making a strong comeback. Interest rates have been at record lows and home prices have been steadily rising. But after years of recovery, we may have inadvertently begun to create another bubble like the one that caused the housing crisis in the first place.

This government chart clearly shows the last bubble that was created. This measures the difference between home prices and rental units. More specifically, the light blue line measures what it costs to own a home while the dark blue line measures the would be cost of renting the same home. Between 2000-2006 there was a huge and growing gap between the cost of buying vs. renting. The financial crisis corrected this bubble and brought home prices more in line with historical averages.

Pay attention to the last centimeter or so of the graph. Sometime around 2011, the light blue line began to rise sharply in comparison the the dark blue line. If this trend continues it will indicate that homes are once again becoming much more expensive than renting.

Now here is another graph that is less technical, but perhaps more telling.

This one shows the median and average square footage of new homes. During the last bubble, new homes got larger and larger. It was the era of McMansions. After the crisis, home sizes fell significantly. But once again, home sizes began to creep higher starting in 2011. As of right now, home sizes have actually hit a new record. This means that the average home built today is larger than during the peak of the last housing bubble!

Be Careful America

Right now homebuyers are feeling quite excited. Prices are rising and interest rates are low. Things are looking pretty great. I'm not trying to put a damper on this excitement, but I think that it is important to be cautious. If we are not careful, this type of activity could quickly begin to re-inflate a real estate bubble. Try not to forget what happened last time.