WSJ Dean Baker: We’re Still In a Housing Bubble

I couldn't find a discussion on this so thought I'd post. Whether you're a bull or bear, it's hard to argue with this analysis. The FHA part doesn't really apply to Manhattan, but the basic fundamentals sure as heck do. My profession is affordable housing development/investment and I am an avid supporter of affordable housing...to RENT! The government is just continuing to artificially inflate... [more]

I couldn't find a discussion on this so thought I'd post. Whether you're a bull or bear, it's hard to argue with this analysis. The FHA part doesn't really apply to Manhattan, but the basic fundamentals sure as heck do. My profession is affordable housing development/investment and I am an avid supporter of affordable housing...to RENT! The government is just continuing to artificially inflate home values that are unsustainable over the long term. http://blogs.wsj.com/developments/2010/01/26/dean-baker-were-still-in-a-housing-bubble/ WSJ - January 26, 2010 By Nick Timiraos Home prices have posted six months of gains, according to the Case-Shiller home price index, released this morning. But some housing bears say that the fundamentals don’t support those price gains and that, even once the market finds a bottom, home prices aren’t likely to show significant appreciation for many years to come. Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says. Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come. Far from some rosy estimates that housing is going through a temporary, once in a lifetime downturn, and that once the market bottoms, homes will again appreciate well beyond the rate of inflation, Mr. Baker argues that home prices are far more likely to increase annually at the rate of inflation, at best. “If anything, I expect housing to be weaker than normal rather than stronger over the next decade,” he says. “People who say this is a temporary story, there’s no real reason to believe anything like that.” The recent burst of good housing news has been fueled by government stimulus, including the tax credit, low mortgage rates and easy financing from the Federal Housing Administration. Mr. Baker, who had been a skeptic of the tax credit, concedes that it has worked. So, too, he says, has the FHA effectively supplied credit to goose sales. But that’s likely for the worse, he argues, taking the opposite view of policymakers at the FHA. “As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.” [less]