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The price of US housing is 12% higher than a year ago on a national average. The acceleration concerns the entire country. Such vigour had not been observed since the mid-2000s, right in a middle a credit bubble. At that time, the price boom was based on excessive indebtedness facilitated by securitising mortgage loans, especially in the subprime segment. At first glance, there is nothing similar today. The strength of housing demand has both specific (pandemic) and fundamental (demographic) causes, which are reinforced by low borrowing rates. Sensitivity to interest rates is a risk factor.

The week’s focus

After rising at an average annual clip of 5% as of 2015, house prices have accelerated sharply in the last year. The pace has more than doubled on a national average. The average real price (i.e. deflated by the inflation rate) has returned to the peak reached in 2006. We all know what happened next. Apart from this similarity in house price levels, the present situation and the housing bubble of 15 years ago have little in common. Three differences in particular should be highlighted.

• The geographic distribution of prices. In the mid-2000s, there were very large disparities from one place to another. In some metropolitan areas, house prices rose by almost 40% per year between 2004 and 2006 (Los Angeles, Phoenix, Miami, Las Vegas), while in other areas house prices were moving in line with inflation, i.e. they were stable in real terms. In the current period, the home price increase is certainly not uniform between states, but it does show a great deal of homogeneity (chart lhs). As such, it can be assumed that the increase reflects economic and social factors rather than speculation (chart lhs).

• The interest rate effect After the 2001 recession, borrowing rates had fallen but not the extent that could explain the acceleration in prices in the following years. The cause was the easing of lending standards (subprime securitisation). Prices were deviating from their fundamental value, which can be estimated by adjusting them for changes in income, inflation and changes in borrowing rates. The deviation of the real price from this adjusted level gives an overvaluation of 25% in 2005-2006, whereas today the deviation would be negative by about 15% (chart rhs). The price at which the median household can access real estate has increased thanks to the rise in disposable income (which was accentuated during the pandemic recession) and thanks to the fall in borrowing rates (3.0% in 2020 vs 5.9% in 2005).

• The household balance sheet. The bubble burst when the burden of real-estate debt became unsustainable for households. At its peak in mid-2006, it represented over 70% of GDP. In Q4 2020, the ratio was just 51%. 

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