Wednesday, July 24, 2013

United States Housing - Setting Up For the Next Bubble?


Updated September 6th, 2013

According to the Federal Housing Finance Agency's (FHFA) monthly house price index which is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac, U.S. home prices rose by 0.7 percent in the month of June alone and 2.1 percent over the previous quarter in Q2, 2013.  This is the eighth  consecutive quarter of house price appreciation adding up to a year-over-year price rise of 7.22 percent, reminiscent of levels last seen in 2003 and 2006.  This brings the U.S. index to 11.2 percent below its April 2007 peak and inline with the index level last seen in February 2005 as shown here:


I noticed one very interesting thing about this graph; the steepness of the rise in home prices since the early part of 2012 mimics the steepness seen in the years between 2002 and 2006 as the housing bubble formed.  You will notice that the steepness of the curve was quite a bit shallower in the early to late 1990s before the housing market really took off.

Here is a month-by-month breakdown showing the monthly appreciation rates for housing since December 2011:


In my opinion, I think that it is likely that the non-seasonally adjusted appreciation rate has shown a sharp climb since the beginning of 2013, largely due to this:


Here's an even more detailed look at what has happened to the 30 year mortgage rate during the seven months since the beginning of 2013:


Since January, 30 year mortgage rates have risen from 3.34 percent to its current level of 4.57 percent, a rise of 1.23 percentage points.  While this doesn't particularly seem like much of an increase in raw percentage terms, it is actually a significant rise of 35 percent.  For example, on a $250,000 mortgage, the monthly payments on a 30 year mortgage at 3.34 percent are $1100.40.  If we increase the interest rate to 4.5 percent, the monthly payments rise to $1266.71, an increase of just over $166 every month.  To already indebted home owners, this is a significant increase and will ultimately roll through the economy, taking its toll on consumer spending.

The housing market price appreciation over the past 12 months is not evenly distributed across the United States as shown here:


The current winners of the housing market "lottery" are the Pacific and Mountain states that were particularly hard-hit during the housing market implosion with non-seasonally adjusted annual price changes of 17.0 percent and 11.0 percent respectively.  This is far above the rates of every other region save the South Atlantic states which saw an increase of 8.6 percent.  Can we say the word "bubblicious"?  The Eastern states are the losers with New England seeing a seasonally adjusted annual housing price rise of 3.7 percent and the Middle Atlantic states seeing a paltry rise of 2.5 percent.  These areas were not as hard hit as the Pacific, Mountain and South Atlantic states during the Great Recession and probably better reflect the reality of the U.S. housing market.

While very few people are suggesting that there is another housing market bubble in the offing, the coincidence between the recent steep rise in mortgage interest rates in conjunction with the rather steep rise in housing prices overall is more than just a coincidence.  As well, some areas are seeing double digit annual price increases that are quite reminiscent of the market back in 2003 to 2006 and we all know how that ended in tears for millions of home owners.  With buyers in some markets perceiving that interest rates may continue to rise as the Fed backs off on Mr. Bernanke's Grand Experiment, we may be seeing the beginning of a new, geographically selective housing market bubble.

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