When is a Housing Bubble a Bubble or Not?

Dean Baker (right; Co-Director, Center for Economic and Policy Research) and Jed Kolko (left; Chief Economist, Trulia) see things differently concerning the current real-estate-housing market and whether a bubble is, or bubbles are, forming or wil do so in the near future if the pace of price increases continues much longer. (See: Are U.S. home prices rising at unsustainable levels?.)

This "debate" has been heating up over the last couple of weeks. Understand that from Trulia's perspective, it behooves them that non-bubbles be seen as such so that buying and selling will continue. Provided Trulia can adequately compete with its online competition, such a Zillow for one, an active housing market is better for Trulia's bottom line. Trulia has a real perceived need to beat down erroneous arguments concerning forming bubbles. However, we see a lack of adequate definitions out there. What is a housing bubble?

We have no reason to believe that Jed Kolko is being disingenuous. We aren't even suggesting that pro-housing-market activity is consciously biasing his thinking, research, or stated and published analysis.

Jed Kolko is using longterm trend-lines upon which to based his work. The issue, the "debate," as we see it, arises when real-world, real-economy circumstances at least temporarily alter the trend lines so that a new normal prevails at least for a good part of a generation (upwards of 20 years for our purposes here).

We're already 5 or so years into the Great Recession and slow "recovery." Middle-class buyers are fewer but housing inventory hasn't even kept pace with the shrunken pool of buyers. The market is working on that; but even if, or when, inventory recovers, we need to consider a few things.

When it recovers, will unemployment remain high or loan requirements remain at high standards and therefore keep buyers low while inventory perhaps rises enough to lower current prices down well below Jed's long-term trend line? Also, bubbles are not clearly demarcated and agreed upon things. They are not suddenly there or not as prices cross some set percentage (say 40%) clearly above the long-term average. It can be argued that a bubble is anything above the trend albeit tiny to start with.

So, there's merit in both Dean Baker's and Jed Kolko's views, but we need the terms defined before we even begin to say whether there are bubbles forming and be able to not be needlessly speaking at cross-purposes.

Here's the heavy-action article: "From Brooklyn to California, Housing Bubble Threat Grows," by Prashant Gopal & Kathleen M. Howley. Bloomberg.

If you are an investor in 1-4 unit properties in Arizona, California, Nevada, Oregon, Utah, or Washington, please do the financially responsible thing and make sure you have proper Landlord Insurance with PropertyPak™. We love focusing on real estate and the economy in general, but we are also here to serve your insurance needs.

Hill & Usher (PropertyPak™ is a division) has many insurance offerings. See our menu above for more info and links.

Did this post help you? Let us know by leaving your comment below.

Note: This blog does not provide legal, financial, or accounting advice. Seek professional counsel.

Furthermore, we, as insurance producers, are prohibited by law from disparaging the insurance industry, carriers, other producers, etc. With that in mind, we provide links without staking out positions that violate the law. We provide them solely from a public-policy standpoint wherein we encourage our industry to be sure our profits, etc., are fair and balanced.

We do not necessarily fact checked the contents of every linked article or page, etc.

If we were to conclude any part or parts of our industry are in violation of fundamental fairness and the legal standards of a state or states, we'd address the issue through proper, legal channels. We trust you understand.

The laws that tie our tongues, so to speak, are designed to keep the public from losing confidence in the industry and the regulatory system overseeing it. Insurance commissioners around the country work very hard to analyze rates and to not allow the industry to be damaged by bad rate-settings and changes in coverages. The proper way for people in the industry to deal with such matters is by adhering to the laws, rules, and regulations of the applicable states and within industry associations where such matters may be discussed in private without giving the industry unnecessary black eyes. Ethics is very high on the list in the insurance industry, and we don't want to lose the people's trust. That said, the industry is not perfect; but what industry is?

For our part, we believe in strong regulations and strong regulators.

We welcome your comments and ask you to keep in mind that we cannot and will not reply in any way or ways where any insurance commissioner could rightly say we've violated the law of the given state.

We are allowed to share rating-bureau data/reports and industry-consultant opinions but make clear here that those opinions are theirs and do not necessarily reflect our position.