Was there a U.S. Housing Bubble in 2008?

[alfred russel]

In the run up to 2008, DGuller and I argued through a zillion threads about whether there was a housing bubble. I thought not, he thought so. When the market collapsed, I admitted I was wrong and we moved on.

But was I wrong?

The Case-Schiller index for the US (tracking single family home prices) hit 184 in 2006 before falling to a low of 134 in 2012. That is a decline of 27%, and most of the fall was in 2008-2009.

However, the index is now about 222. Over the last 14 years, that means if you bought at the very top of the market, you would currently be sitting on about 20% gains, or about 1.3% a year.

Looking at the chart I'm linking to, from 1987 to current day, the change in the index was from 64 to 222, or about 3.8% per year. So in a worst case scenario, if you are bought a home at the very peak of the "bubble", you are unperforming the long term average, but your returns are 1.3% rather than 3.8% if you still hold the home. In a very worst case scenario, if you bought your home in 2006 and sold it about 5-6 years later, you would have lost about 27%, which is of course bad but whether that counts as a bubble really depends on definitions.

https://fred.stlouisfed.org/series/csushpinsa

Our arguments pre 2008 centered on elite locations like NY and SF. Looking at NY, it is less positive for my side of the old argument--we still haven't reached the 2006 peak.

https://fred.stlouisfed.org/series/NYXRSA/

But in SF, things have more than recovered.

https://fred.stlouisfed.org/series/SFXRSA

[crazy canuck]

I appreciate the propaganda effort to convince us you are not using a sock puppet.

[The Minsky Moment]

20% return since 2006 is pretty awful given that a far more liquid investment in the S&P 500 index returned over 150% the same period.

To the extent the case for the 2008 non bubble is based on housing prices in the Bay Area, it's a weak case.  That is an anomalous market with extreme demand and constrained supply.

[alfred russel]

20% return since 2006 is pretty awful given that a far more liquid investment in the S&P 500 index returned over 150% the same period.

A comparison to the S&P 500 is not reasonable--historically housing has severely underperformed the S&P 500.

[Sheilbh]

Doesn't it depend on the location?

So there wasn't a bubble in certain urban locations like NY or SF because it reflected the level of demand and supply which is still driving prices. But there was a bubble in certain types of property and certain locations. This is similar to Ireland where the Dublin property market has entirely recovered and is very hot because there aren't enough properties for the number of people who live there, but you still have ghost estates of suburban houses built by developers in the Celtic Tiger days that can't be shifted.

That "bubble" wasn't, in my view, a housing bubble but a financial bubble and housing was just one of multiple asset types impacted. It's the one we feel because it has more real life impact, but we felt the impact of the other ones too. It reflects the needs of China but other emerging markets to have dollar assets, the Atlantic links between American banks and European banks which were dramatically overextended (even more than the Americans) and a lot of hubris: that we were and the markets, products, tools, regulators we had developed were too sophisticated for this.

So to an extent the bubble wasn't the housing - there's suddenly a glut of houses and not enough demand - but a product of the financialisation for want of a better word of housing. It's a little more consequence than effect.

[DGuller]

In hindsight, it may have been less of a bubble and more of a realignment.  I think that a growing inequality is resulting in many people having more money than they know what to do with, and that results in very low interest rates and ballooning asset prices.  I agree that comparing returns on real estate and stock market is not fair, because you use a lot more leverage to invest in real estate than you do investing in the stock market.

[The Minsky Moment]

20% return since 2006 is pretty awful given that a far more liquid investment in the S&P 500 index returned over 150% the same period.

A comparison to the S&P 500 is not reasonable--historically housing has severely underperformed the S&P 500.

OK but you've already established that housing has performed far worse in the last 14 years than the usual return.
If you wait long enough, sure things will start to smooth out.

[alfred russel]

OK but you've already established that housing has performed far worse in the last 14 years than the usual return.
If you wait long enough, sure things will start to smooth out.

2.5% worse per annum.

Or to put it another way, if prices are flat for 10 years (by about 10 years they had recovered), is that indicative of a bubble?

I guess it goes to the definition of a bubble.

[The Minsky Moment]

If you are 14 years out, and annual returns are still 1/3 of typical, then yes that is indicative.

[DGuller]

If you are 14 years out, and annual returns are still 1/3 of typical, then yes that is indicative.

Again, I think it's a mistake to leave the leverage part out of it.  If I had an asset that appreciated at a rate of 3.5% per year, with absolute dead certainty year after year, and I could borrow as much as I want at 3%, I would definitely like that asset way more than S&P 500, even if S&P 500 would return 6%.  Real estate isn't going to go up and down nearly to the same degree that stocks will, so risk appetite being equal you can load up on much more leverage.  In fact, pretty every everyone who buys a house buys it on the margin.

[The Minsky Moment]

That's an argument about the relative desirability of asset classes not whether RE was a bubble.

As for asset class comparison the long term return on the S&P 500 has been about 10% annually.  It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.

[DGuller]

That's an argument about the relative desirability of asset classes not whether RE was a bubble.

As for asset class comparison the long term return on the S&P 500 has been about 10% annually.  It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.

Yes, it's a different argument to some extent (though you're claiming it was a bubble because the returns since then are bad), but I'm still stuck on how you're defining RE underperforming the stocks.  I'm not talking about whether it's expensive to leverage, I'm talking about the difference in riskiness allowing for different leverage ratios. 

Leverage can multiply the returns of any investment, but if the underlying returns are risky enough, then leverage can wipe you out before you can cash in on your gains.  That's why you can't just compare which asset is a better investment based on their expected returns, at least not according to what I learned in modern finance. 

Riskier assets can be leveraged less than safer assets, for the same level of risk appetite, so you have to risk-adjust the returns before you compare them.  It doesn't look to me like you're risk-adjusting the returns when you're comparing S&P 500 performance against RE performance and concluding that the latter is a worse investment.

[alfred russel]

That's an argument about the relative desirability of asset classes not whether RE was a bubble.

As for asset class comparison the long term return on the S&P 500 has been about 10% annually.  It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.

They are fundamentally different categories. The S&P 500 involve equity investments in large for profit american corporations. A single family home generally involves land and a depreciating building, which people use as an investment vehicle, a savings vehicle, and a place to live.

You can compare the expected appreciation of a single family home to the S&P 500 if you want, but the land involved seems more analogous to a commodity such as gold and the building a durable good such as an automobile.

[DGuller]

Yeah, another thing ignored is that your house pays out a dividend, in the form of shelter provided or rental income earned.  Even if it doesn't appreciate at all, it still gives you returns just on that basis.  That said, the S&P 500 index probably doesn't account for dividends, but I think percentage-wise the house's dividends are much greater than the average stock dividends.

[The Minsky Moment]

They are fundamentally different categories. The S&P 500 involve equity investments in large for profit american corporations. A single family home generally involves land and a depreciating building, which people use as an investment vehicle, a savings vehicle, and a place to live.

I agree they are fundamentally different categories, for the reason you say.  Viewed purely as a speculative investment vehicle, however, it is a dubious asset category.