The Housing Bubble Is Even Bigger than The Stock Market Bubble

The comments below are an edited and abridged synopsis of an article by Mike Shedlock

Stocks may be expensive based on historical measures but it’s nothing compared to skyrocketing home values, says Robert Shiller.

The Housing Bubble Is Even Bigger than The Stock Market Bubble | BullionBuzz | Nick's Top Six
House floating in a bubble on blue with copy space. Metaphor for real estate bubble financial crisis.

“Consider that the Case-Shiller National Home Price index has gained in excess of 6% per year on average since January 2012, while net rental income has barely kept up with inflation, increasing just less than 2% per year. The result is that home prices seem as overvalued as they were in the spring of 2005, nine months before the peak.”

“One way to measure home valuations is with a cyclically adjusted price to earnings (CAPE) ratio developed by Yale University professor and Nobel Laureate Robert Shiller for stocks. The concept can be applied to a broad swath of assets by dividing the current price of an asset by the average annual inflation-adjusted earnings over the prior 10 years. The chart above shows CAPE for U.S. home prices and the S&P 500 Index since 1996.”

“The bad news is all previous history came at higher mortgage rates. The average 30-year fixed mortgage rate fell below 3% for the first time in August 2020, and rates are close to the lowest possible levels given the credit risk and costs of writing mortgages. It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernable upside.”

Shiller compared home prices to stocks based on CAPE. To compute the CAPE for housing he used rent. Shedlock’s chart looks at household income vs the Case-Shiller Home Price Index; both indexes have a base year of 2000.

Household income is annual, and the latest year available is 2019. Shiller used Case-Shiller quarterly data. Since 2000, median household income is up about 64%. Home prices are up 118%.

Robert Shiller calls this a bubble, and so does Shedlock.

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