Market Overview

The Risk Of Another Housing Market Crash

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The Risk Of Another Housing Market Crash

It’s been about 12 years since the bursting of the U.S. housing bubble that triggered the Great Recession. Fortunately for homeowners, the housing market recovered relatively quickly. Yet there are warning signs that new localized bubbles could be starting to burst again.

Signs Of A Bubble

Bubbles are notoriously hard to recognize in real-time, but there are certainly telltale signals to watch in the housing market. Per-capita U.S. income was up 25 percent from 2011 to 2018. During that same stretch, housing prices nearly doubled that gain, rising 48 percent.

The Case-Shiller national home price index hit a record high in November 2016. It is now more than 10 percent above its 2007 peak. In certain cities, the market seems even more overheated.

Housing prices in Denver and Dallas are 40 percent above 2007 peaks. Portland and Seattle housing prices are 20 percent above 2007 highs. There are already signs that these overheated markets are cooling off. Seattle home prices are down more than 5 percent from their 2018 peak, the largest drop since the last crisis.

Prices in San Francisco, Los Angeles, San Diego, Denver and Portland are also down in the past five months.

As of the end of 2018, CoreLogic found that roughly one-third of the nation’s 100 largest metropolitan housing markets were overvalued.

Experts Uneasy

The rapid ascent of housing prices in the past decade has some experts concerned about where prices are destined over the next several years.

Stack Financial Management President James Stack warned his investors prior to the last recession about a “dangerous bubble” in the real estate market and predicted a "$1-trillion-plus government bailout of the mortgage industry at some point over the next decade."

At the time, it was an extremely bold call, but it ended up being a scenario that played out exactly as Stack predicted.

Unfortunately, for more than a year now, Stack has said he is seeing a troublingly familiar setup.

“Median family home prices are 32 percent above the long-term inflationary trend — in other words, it has to fall 32 percent to get down to where it was,” Stack said in late 2017.

“That’s not as bad as the 35 percent in 2005, but it does kind of wake you up and say, 'this isn’t normal, this is going to end badly.'”

Even Nobel Prize-winning economist and housing market expert Robert Shiller recently said the U.S. market is looking a lot like it did in 2006.

“It has been going up linearly for six years now, that’s something that can’t continue,” Shiller said in November.

The good news is that he said a potential drop in home prices will likely not be nearly as severe as the one in 2007, but there could be a “significant correction or bear market” in U.S. real estate in the near future.

How To Play It

It seems as if investors aren’t particularly concerned about the near-term strength of the U.S. housing market. After a rough year in 2018, housing stocks and ETFs have bounced back so far in 2019. Here’s how three popular housing ETFs have performed so far this year:

  • iShares Dow Jones US Home Const. (BATS: ITB) is up 12.3 percent.
  • SPDR S&P Homebuilders (NYSE: XHB) is up 13 percent.
  • ISHARES TR/RESIDENTIAL RL EST (NYSE: REZ) is up 10.8 percent.

Related Links:

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Posted-In: James StackAnalyst Color Futures Top Stories Economics Markets Analyst Ratings Real Estate Best of Benzinga

 

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