Housing prices are still surging, but a bubble doesn’t seem likely

Last week we learned that housing prices grew rapidly yet again in January.

The widely followed S&P CoreLogic 20-City Home Price Index was up 19.1% compared to January of last year – a blistering pace, especially considering that the growth was on top of the 11%-plus growth rate reported for January 2021.

It’s highly anomalous for housing prices to rise over 32% in a span of two years, and so the trend is causing some economists to start worrying about a possible bubble.

In the chart below, you can see the acceleration in prices that has occurred over the past year and a half. The growth rates we are now seeing exceed those immediately preceding the Great Financial Crisis.

That’s enough to make anyone a little nervous, especially now that mortgage rates have risen to nearly 5% from a low of around 2.7%.

But there is one big difference between today’s bull market in housing and the one that ended so badly more than a decade ago. Generally speaking, we are not seeing the kind of speculation that was so rampant back then.

We don’t see “investors” buying multiple condos with the expectation of selling them at a large gain within a matter of months. And we don’t see the critical ingredient that made this “flipping” activity possible, which was the ready availability of credit on very easy terms.

Fortunately for all of us, the trauma of the GFC was enough to teach banks and regulators a lesson they won’t soon forget.

Shady lending practices, to include very small or even no down payments, adjustable-rate mortgages, mortgages without proper documentation, teaser rates, pay-option ARMs and inflated sales appraisals, are not contributing in any meaningful way to the strength in housing prices we are now seeing.

And more critically, there is only a very limited market for bonds backed by sub-prime or Alt-A mortgages, keeping origination activity for unqualified borrowers limited as well.

The strength we are seeing in today’s housing market has a much more straightforward explanation.

Rather than speculation and easy credit, there has simply been a large mismatch between the supply of and demand for housing, and the mismatch is especially pronounced for lower-priced, entry-level homes.

On the supply side, it has become fairly obvious that new home construction has been far too low since the GFC.

It’s understandable that homebuilders would be skittish in the years immediately following the collapse of the housing market. But the construction deficiencies have endured up through present day.

Some of the factors inhibiting building activity include a severe shortage of labor; supply-chain disruptions associated with trade wars and Covid; rapid inflation in raw materials; and land shortages driven by zoning restrictions and land-use…