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. 

 

City vs. Rural Homes

In my post yesterday I talked a bit about the fact that Americans have the largest homes of any country in the world. But I have also written about the fact that living in cities can be extremely cramped and expensive. So today I decided to talk about the differences between living in the city and in rural areas in terms of space.

Ultimately, homes are much larger in the suburbs and in rural areas compared to cities. For example, in Boston, prices can run upwards of $1,500 per month per bedroom for an apartment or condo. In the far reaches of the Greater Boston suburbs, $1,500 per month can buy a four bedroom house and leave you with money to spare.

This difference in home sizes used to play into the idea that people in the suburbs were wealthy while those in the cities were poor. For a long time, this general idea held largely true. More recently, poverty rates have increased in suburbs while cities have seen increased gentrification. Now a family of four may live in a nice four bedroom suburban home but may be in a worse financial situation than a similar family cramped into a two bedroom apartment in a city. 

It seems that perception of wealth may be changing and therefore so are the material items that people value. For the better part of American history, having an impressive house was among the most important status symbols. But now as many people are electing to have smaller, more humble homes to live closer to cities, it appears that other factors, such as eco-friendliness or perhaps access to public transportation, are redefining American status.