by. Michael Corn
There is a debate right now as to whether rising home prices are a sign of recovery or a sign of the beginnings of another devastating housing bubble.
The monetary policy of the Federal Reserve is often blamed for the original housing bubble, but according to former White House counsel, attorney and fellow in Financial Policy, Peter J. Wallison, who correctly predicted the 2007 / 2008 bubble, the government’s housing policy was the biggest factor. Specifically the low to no requirement for down payments had a larger effect. In that way, today’s trends easily mimic what we were experiencing a decade ago.
When housing prices are rising at double the rate of rental prices—which they were then and again now—that is a red flag. Couple that with the fact that homebuyers are not required to invest a significant down payment (such as the traditional 10 – 20%), and what you have is people purchasing much more expensive houses than they would be buying otherwise… or that they can truly afford.
As scholars and reporters with the National Bureau of Economic Research have claimed for nearly a decade, when real, long-term interest rates rise unexpectedly or there is a decline in economic growth, house prices can easily fall. When we have exceedingly low interest rates, housing costs becomes much more sensitive to these types of changes and can result in overvaluation. Cities in the United States with significant overvaluation of 10% include Los Angeles, CA and Austin, TX. Other cities with a 4% – 7% overvaluation include: San Antonio, TX, Honolulu, HI, Houston, TX and San Francisco, Riverside-San Bernardino and Oakland, CA.continue reading »