Case-Shiller released their latest numbers on April 26. In absolute terms, prices are 57% above the bubble peak in 2006.
Of course, the Fed has printed so many dollars that today’s dollars are not worth nearly as much as 2006 dollars. We therefore need to adjust for inflation. After adjusting for inflation, Cash-Shiller’s National index is about 14% above the peak of the last bubble, 16 years ago. Yes, we are above previous peak levels after adjusting for inflation.
Considering housing prices versus rents (similar to a P/E ratio for stocks), we are also above the previous peak.
Bubbles can take on a life of their own and there is no way to know when they will burst. But it is reasonable to state that we are in a bubble of a magnitude similar to the one in 2006. The bigger it gets, the more pain there will be when it bursts. Given that the Fed is tightening interest rates, some buyers will soon be more limited in what they can afford. That will put downward pressure on real estate prices. At the same time, builders seem to finally be delivering inventory. There is a still a shortage of inventory in many markets, and there seems to be a fear of missing out.
Many young people, who did not experience the previous crash, may believe that this time things are different. Or that if values went up 36% last year, like they did here in the West Plains (versus this time last year) values are likely to go up another 36% next year. I know some buyers who bought at the last peak would have had to sell at a loss unless they waited about 5 years.
It is a good time to be cautious if you have a short term time horizon. On the other hand, if you have a long term time horizon, long term, leveraged real estate is usually better than cash. Particularly if you use it to generate rents (revenues).
Below are the Market Statistics for March 2022 for the West Plains. Medial sales price was $419,998, up 35.6% over March 2021. Median days on market was 4. We are still in a seller’s market. But a 35.6% change is obviously not sustainable.
