This is the third of three articles about the U.S. housing market. Ex-housing, the U.S. is in deflation currently at -1% YoY. So the only current “inflation risk” that might justify the Fed raising rates is the appreciation in house prices. In my previous two posts, I explained that both housing and apartment demand are supported by increased demographic demand, as the Millennial generation creates about the same affect on single and multi-unit housing as their Boomer parents and grandparents did 50 years ago. Further, there has been a marked increase in foreign buying of homes, skewed towards the upper end and disproportionately all-cash purchases. As a big part of this increase has come from Chinese nationals, the current problems hitting that county may ease demand, and therefore ease upward pressure, on U.S. house prices.
But some have argued that housing has entered a 2nd bubble. Some of this comes from the usual Doomer chorus Seriously, one guy actually claimed a couple of weeks ago that there was a bubble in rents! It must be the Underpants Gnomes theory of bubbles:
1. rent lots of vacant units
What’s the missing step 2? Sublet everything, because everyone knows that rents only go up?!?
But some is more serious analysis. The website Political Calculations, for example, believesthere is a bubble based on the movement in prices vs. median household income. Here’s their relevant graph:
The point of view does have merit, since after all it is households buying houses! But I believe that misses the bigger picture.