Housing Bubble 2016?




The most frequent question I got in 2016,  (aside from the ubiquitous query if America is going into recession) is if U.S. home prices are in a bubble which will eventually lead to a significant collapse.  The short answer is no.  One must be careful with the use of that frightening word “bubble.” Small ebbs and flows in pricing occur regularly and should not be confused with an actual economic bubble formation.

The features of an economic bubble popping, include a 35%-65%  minimum decline in prices over a short duration. An excellent historical example of a stock bubble that can be used for comparison is South Sea stock prices in the early 1700s.

Issac Newton:

“I can calculate the movement of stars, but not the madness of men.”

Also, a real bubble is a disconnect from economic fundamentals that needs speculation to push prices higher.

Issac Newton’s investment in the South Sea underwent a massive spike due to speculation and then collapsed in a very aggressive fashion.  Now that’s a bubble!

For U.S. housing economics, I recommend following this simple rule: If inventory breaks under 6 months, and distress sales start to fall, then expect to see home price gains.

If we look to our own immediate history, we see that housing inventory blew up from 2006-2011 when a lot of distressed homes came into the market place.  In 2012 inventory finally broke down to under 6 months. This collapse in inventory will be yielding price gains in housing for years to come.  Thus, since 2012, home prices have been rising.


 Having said that, although nominal prices have been strong, once you adjust to inflation, home prices have not reached the peak levels of housing bubble years.

From Doug Short:

Logan Article P 1

Unlike the housing bubble years, “when anyone with a pulse could get a mortgage,” and, perhaps more significantly, anyone could cash out on their homes as well, in this cycle quality is more important than quantity.  This cycle has the best loan profiles I have seen in my 20 years in finance.  All the homeowners in this cycle can own the debt, and the debt is very vanilla, i.e., no exotic or stated income loans.  This is another reason why mortgage demand isn’t booming, we lend to capacity now.


From Calculated Risk:

Another essential factor to keep in mind when assessing if bubble economics are in play is demographics!   We had good demographics for housing because the prime age labor force growth from 1996-2007 was robust. However, the increase in the prime age labor force was not good enough to sustain the massive speculation on housing and to have so many unqualified buyers become homeowners. It was not organic demand but exotic loan structures that allowed anyone to buy and drove up prices. This phase took place during the years 2003-2006. That was the time when exotic loans allowed the housing market to continue upward at full speed.

With those types of loans no longer in existence, we have no excess speculation on debt in this cycle. Today, we have a lot of Americans who own homes with equity and occasionally borrow against that equity within conservative parameters.  We also have had the highest percentage of cash buyers in this cycle that I can remember. Cash buyers comprise 25%-30% of the entire existing home market for years now.   Even in 2016, these cash buyers continue to make up 25% of the purchases, whereas in pre-recession years they would make up about 10%. This should shock no one considering a large number of distress homes that have been in the market.

Although  I can’t conceive of a rationale that would lead to a  35%-65% crash in home prices and I wouldn’t use the word bubble, that doesn’t mean that I don’t expect prices to never fall.  When inventory breaks over 6 months, we will see a downturn, but this is something that hasn’t happened in the 20 years, outside the housing bubble bust years.
It might take a U.S. recession to create 6 months annual inventory.

For more on this see:


  When that happens, then we will see price declines, but without a significant increase in the number of distressed homes in the supply, prices won’t fall like they did in the housing bust years. Remember, we have a high number of cash buyers in this cycle, and cash purchases don’t foreclose.  Plus, the loans in this cycle are not high risk, as they were in the previous cycle–  and this is a good thing for America. Even the new bank statement loans that are now available are of very high quality.  Today our typical homeowner has a low fixed debt payment against rising wages with some equity built up. This is as pretty as it gets.

The downside to this pretty picture (every silver lining has a cloud after all),  is that housing inflation is real and here to stay. I don’t subscribe to the recurring thesis that housing is the cheapest it’s ever been. The affordability index that is being used is outdated. It assumes that buyers have 20% down.  But our typical buyers cannot provide a 20% down payment, and as housing prices climb, this will become more and more difficult.

Additionally,  it’s harder for a move up buyers to put 20% down as they would need conservatively  28% -33% equity to sell and pay transaction costs, to have an even a remote chance of having 20% down for a bigger home. So the boom in prices from 1996 to 2016 does come with a negative. One item that doesn’t get talked about much is that as shelter costs grow, that leaves less disposable incomes for other consumption items.

From Dough Short:

Logan artilce 2

In every housing cycle since 1981,  mortgage rates have fallen 2% or more.   In this cycle, the low range has been 3.25 to 4.25% For a 2% fall in rates in the next cycle, we would need mortgage rates to be 1.25% – 2.25 %.  This would likely mean the 10-year treasury yields would fall below zero.  Unlikely much?

The best case against negative rates here in the U.S. is that our younger demographic growth will keep a lid on any significant deflationary push downward.

However, as you can see from the chart below, the trend is your friend!

From Doug Short



As housing prices grow and debt sizes get bigger, lower mortgage rates are needed for borrowers to afford the more massive debt.

Remember, when rates hit 4.5% in 2013/2014, it created an 18-month negative trend in purchase application.   The year 2014, the 6th year into the economic expansion, had the lowest number of purchase applications ever, once adjusted to population.

While we are not in a housing bubble, the housing inflation story is real and is going to be very difficult to correct.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987.


11 thoughts

  1. I think the USA as a whole is not in another housing bubble but certain regions definitely are again.

    The trendy west coast markets in particular are so overheated, where house prices far exceed reasonable debt to income, there is flipping going on left and right, flipping seminars are back, bidding wars are back, and the “must buy now” mania has returned just like its 2006 all over again. Case in point is my current city in Oregon: housing prices skyrocketed 300% from 2002 to 2007, cratered 50-60% in the recession, and now have rip roared back another 200-300% again. Here, median home prices are around 450k (for very average 1100sq ft borderline fixer uppers) and median household income is 43k…. Anyone want to tell me how that is affordable to the locals? A ways away in Portland isn’t much different, which has its own bubble fueled by outsiders pouring in, while the biggest employer Intel lays off thousands yet again, the city has a freakishly weak economy and always has. Meanwhile further north, Seattle is becoming the new Vancouver for hiding Chinese money, but at least Seattle has a real economy with many high tech jobs to support a higher baseline. Can’t say the same for anywhere in Oregon. And don’t even get me started on San Francisco and the Bay Area, which is comical at best in every which way. Then you look at Ohio, Minnesota, Georgia, where those 150k new nice 2000sq ft homes look like an alternate reality, given the entire home price isn’t even a down payment out west for something half its size. Curious times we are living in!

    1. However, in all the areas you talked about. The Home buyer profile is much different now than it was back in 2003-2006 where we had speculation debt on non capacity owning debt. Plus the cash out craze of 2004-2006 actually created a 2 year period where no much equity was built.

      The ability to get distress supply on to the market like we saw from 2006-2011 is impossible.

      People will lose their homes when they lose their jobs. Late cycle lending with low down payment loans will be the high level risk.

      Housing isn’t affordable like I said in the article but a bubble type of price decline is going to be difficult.

      Still, college educated dual incomes household can still buy and this is why home sales are at cycle highs now with the highest level of mortgages buyers in this cycle.

      However, still, we are working from a low rate thesis.

  2. Great article Logan.

    In Central Florida, rental rates exceed PITI by a substantial amount which supports the investment value of housing. The utility value is also buoyed by replacement cost per square foot prices exceeding existing home sale values. I do not know if this holds in other markets.

    1. Florida still has a high level of distress supply because it’s a judicial state, takes forever to foreclose on a home there.

      High condo, investment market with foreign dollars in Florida, makes it a unique housing state.

  3. I think you are missing housing prices to GDP. The spread is widening to 2006 levels. Affordability will eventually dictate the price, and if GDP does not grow new buyers will not be able to come into the market. Add in raising rates, and you get a double whammy on affordability. While it is good that there is a lot of equity in the homes at this point, it just ensures there isn’t a large systemic event, like bank bankruptcies, etc. Large equity positions in home will not cushion a pricing collapse. It just happens this time around more equity will be lost by the owner rather than a bank.

    1. Interest rates went up 1% in 2013/2014, adjusting to population Mortgage demand was at the lowest level ever per the MPA data and home prices still went up.

      Prices are a function of inventory and for those who think prices will fall 35%-65% in a 2 year period in housing, that would require a massive amount of supply and distress supply. That’s not going to happen this time around. Also, typically bubble’s don’t happen in the same sector back to back. Prices will fall once inventory gets over 6 months but a massive bubble price decline isn’t in the works in this cycle

      1. Prices of assets will always be determined by affordability. Inventory is a lagging indicator. Housing prices are rising faster than GDP. It cannot be sustained.

      2. They said that from 2012-2016 and demand has been the weakest on record due to demographics and affordability

        Yet 2016 has the highest level of home sales by mortgage buyers in this cycle.

        Demographic kick doesn’t happen until years 2020-2024, so there is no demand shock, unlike 2007 where prime age labor force growth peaked and then declined.

        We are already in a weak demand curve as mortgage demand is only back to 1998 levels and in 2014 when it hit it’s lowest level ever. Still prices rose

  4. I think you are missing housing prices to GDP. The spread is widening to 2006 levels. Affordability will eventually dictate the price, and if GDP does not grow new buyers will not be able to come into the market. Add in raising rates, and you get a double whammy on affordability. While it is good that there is a lot of equity in the homes at this point, it just ensures there isn’t a large systemic event, like bank bankruptcies, etc. Large equity positions in home will not cushion a pricing collapse. It just happens this time around more equity will be lost by the owner rather than a bank.

    1. This isn’t 2006 all over again

      – Housing demand ( sales) have had their worst demand curve ever

      – Mortgage purchase application demand is only back to 1998 levels

      – No speculation demand going on now like 2006 where 40% of the home sales were investors

      – No exotic loan debt structure in this cycle like there was from 1996-2006

      – Real home prices are not at cycle highs, unlike 2006

      – 20%-30% of the home were bought with cash, no distress sales risk with these homes

      – prime age labor force growth peaked in 2007 and declined, unlike the 1980’s and 1990’s.. However, the biggest age group in America right now are ages 21-26 .. so no demand demographic risk as well

      100% different market realities

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