Housing Bubble 2016?




The most frequent question I have gotten in 2016,  (aside from the ubiquitous query if America  is going into a recession) is if U.S. home prices are in a bubble which will eventually lead to a major 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 constantly and should not be confused with a true economic bubble formation.

The features of an economic bubble popping, include  a 35%-65%  minimum decline in prices over a very short duration. A nice historical example of an 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  true 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:

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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 that quantity.  This cycle has the best loan profiles I have seen in my 20 years in finance.  All the home owners in this cycle have the capacity to 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 important factor to keep in mind when assessing if bubble economics are in play is demographics!   We had good demographics for housing because prime age labor force growth from 1996-2007 was solid. However, the growth 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 home owners. 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 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 the 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 home 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 home owner 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 do not have the ability to provide a 20% down payment and as housing prices climb this will become more and more difficult.  Additionally,  it’s harder for move up buyers to put 20% down as they would need conservatively  28% -33% equity to sell and pay transaction costs, to have a 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:

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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%   In order 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 major deflationary push downward.

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

From Doug Short



As housing prices grow and debt sizes gets bigger, lower mortgage rates are needed in order for  borrowers to afford the larger debt.

Remember, when rates hit 4.5% in 2013/2014, it created a 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.