4 Experts Discuss: Are We On the Verge of Another Housing Bubble?

It’s a big question in real estate: Are we in the midst of a healthy recovery? Or on the verge of another devastating housing bubble?

Analysts disagree, but it’s tough to ignore the eerily familiar signs:

But before you hop on the bubble train, consider this: Prices are still down 28.4 percent from the 2006 peak, according to the Case-Shiller index.

Baffled? Let’s get a handle on the data and see how other analysts are reading the market. Is another housing bubble imminent?

Bubble

Are we experiencing healthy growth, or is another housing bubble forming?

YES: “We’re heading into a housing bubble”

Mortgages remain out of reach for many would-be buyers. Tight credit standards are curtailing prices, but professor of economics Karl Smith fears looser standards are right around the corner.

“Some time in the near future it is very likely that credit standards…will fall,” said Smith in a recent Forbes.com article. “This rapid increase in the number of buyers and their purchasing power will likely drive home prices into a bubble. Likely not as large as 2005, but it’s not out of the question that the bubble could be even larger.”

YES: “Growth is driven by investors and is not sustainable”

Analysts like David Stockman believe that first-time home buyers and trade-up buyers must be present in a healthy market recovery.

Logical enough, right? The problem for Stockman, former director of the Office of Management and Budget in the Reagan Administration, is that today’s recovery is missing those key participants. Bolstered by investors, the current recovery appears unsustainable to Stockman.

“We don’t have a real organic sustainable recovery,” Stockman said to Yahoo’s Daily Ticker. “…Massive amounts of ‘fast money’ is rolling in to buy, to rent, on a speculative basis for a quick trade. And as soon as they conclude prices have moved enough, they’ll be gone as fast as they came.”

Housing bubble panic

Some analysts say we’re hitting the panic button too early.

NO: “We’re panicking way too early”

Inventory falls far short of demand in many markets. Economist Diane Swonk says a bubble can’t exist until a healthy portion of that demand is satisfied.

“Some worry that a bubble may be forming but we still have a long way to go to meet pent up demand, let alone any level considered ‘normal,’” said Swonk, Chief Economist and Senior Managing Director of Mesirow Financial.

NO: “We’re in a strong recovery, not a bubble”

Housing prices are rising fast in California. Very fast. The median price for existing California homes rose 24.2 percent from February 2012 to February 2013.

But as Realtor.com president Errol Samuelson points out, median prices are still far below the 2006 peak, and should be no cause for alarm.

“It’s important to put these increases into perspective,” Samuelson said to AOL. “Despite these gains, home prices nationally in January were still 21.4 percent lower than they were at the peak of the housing boom in June 2006. Today, California prices are still 34.8 percent below the peak level. California prices haven’t even recovered half of what was lost.”

Our position: Who can spot a bubble until it pops?

Wikipedia says it best: “An economic bubble is difficult to identify except in hindsight.”

Consider that well into 2005, experts (including then Federal Reserve Board Chairman Alan Greenspan) downplayed the possibility of a housing bubble. The ensuing price plunge was the steepest since the 1989 Savings and Loan crisis.

So we can theorize. We can analyze. But can we ever truly know if a bubble exists until it pops?

Photos courtesy of Nathan Jongewaard, jmawork