Greenspan Times Are Here Again
There is some frothing in the housing market...
It appears that the Fed’s zero-interest-rate and QE policies have finally achieved its insane goal of re-igniting a housing bubble.
The Case-Schiller 20-City Index shows that housing prices increased by 1.2 percent in February and 9.3 percent year-over-year. All cities included in the index experienced substantial gains, which have been driven by staggeringly large increases in the bottom tier of the market. In Phoenix housing prices rose by 23 percent over the past year, but by 39 percent in the bottom third of the housing market. Las Vegas home prices were up by 17.6 percent in the past year while prices for houses in the bottom tier rose by 34.2 percent, and at an annual rate of 56.2 percent in the last three months. In Atlanta, bottom-tier home prices rose 36 percent year-over-year and at an annual rate of 70 percent in the past three months.
In light of the current data, Dean Baker, one of the few left-of-center economists to issue an early warning about the last housing bubble, sees signs of a renewed housing bubble on the horizon:
"This rapid increase in house prices should be prompting serious concern among regulators. At the moment, it is not driving the economy in the same way as the housing bubble did in the last decade. Construction is still at very low levels, so a plunge in prices could not have impact on the economy through this channel. While saving rates are again low, possibly due in part to increasing home equity, it is likely that the data are somewhat distorted by the large dividend payouts of the fourth quarter. If the saving rate remains below 3.0 percent into the second half of the year (the post-World War II average is more than 8.0 percent) then this would suggest that inflated house prices are playing a role. If that is the case, a decline in house prices would lead to another hit to consumption.
However the main reason that the rapid run-up in prices in the bottom tier should be a cause for a concern is that moderate-income homebuyers may again take a big hit if these prices plunge in a correction."