House Price Fever?

Yesterday’s news that the Case-Shiller index continues to move upwards is not necessarily good. The index shows that home prices rose another 0.3% in February bringing the increase since that time in 2012 to 9.3%. That’s the fastest annual rate of price increases for six years.

The winding down of foreclosures, low interest rates, and limited inventories have combined to push prices up. All the cities included in the index saw prices rise, so this is not just some local phenomenon, and hopefully not the re-emergence of a bubble.

Perhaps.

The pace of price increases in some cities is now perilously close to levels that would qualify as a local bubble were they to continue for too long. Phoenix, for example, has seen prices rise 23% over the past year. Just to put this all in context, New York City saw prices rise only 1.9% over the last year. The Phoenix experience can be explained partly, at least, by the enormous plunge in prices there during the crisis. I have argued before that prices overshot downwards during the crisis and thus created the possibility of a rapid recovery once conditions settled back down. Hopefully this is what we are seeing and price increases will level off as the overshoot is properly compensated for. Remember, also, that the screeching halt in construction caused by the crisis left the nation with a shortfall of single family housing. That shortfall is also having a mild effect on prices as demand currently outstrips supply.

Two other cities – Atlanta and Dallas – also saw record year over year price increases during the past twelve months, although in the case of the latter the historic data is very thin so there may not be much meaning to such a record.

Nonetheless the recovery of housing, which by most measures is now well established, is something we need to keep a close eye on. Interest rates are not going to rise any time soon. The continuation of aggressive monetary policy – as reflected in those rates – will create the sort of conditions is which a renewed bubble might occur. And given the banking industry’s predilection for forgetting its prior stupidity we all should expect problems to re-apopear in real estate in the medium term.

The fever could return. Let’s hope not.