Tuesday, October 25, 2016

The Echo Bubble In U.S. Home Prices Reaches Previous Peak

The Case-Shiller Home Price Index reached the previous high set back in 2006 with the data set released this morning.


Is this echo bubble the same as the last? It some ways it's worse. Real income is lower today than it was at the peak of the previous bubble. See the blue line in the chart below. Real income is important because it factors in inflation. If the rest of your bills are higher (inflation), it leaves you less money to make your mortgage payment every month.


At the peak of the last bubble mortgage rates were hovering around 6.75%. At the peak of the current bubble interest rates are hovering around 3.75%.


When interest rates move upward it will be more painful from this lower level. If rates just move back to where they were in 2006 mortgage payments will almost double. That means new buyers for homes will have 50% less purchasing power and will need to pay 50% less for a home in order to qualify.

How low can mortgage rates go and home prices rise? We'll have to wait and see. The further this goes on, the more painful it will be when the adjustment process finally arrives.