The US Housing Bubbles Deepens

Bubbles are being blown everywhere. The bubble in the US housing markets, which I have been pointing out, seems to be spreading and or intensifying.

The Bloomberg reports: (bold mine)

Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging.

An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

The U.S. spring homebuying season has been marked by a frenzy of demand fueled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. (Z) and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace -- a dramatic shift from early 2012, when billionaire Warren Buffetts aid housing “remains in a depression.”

Why signs of bubbles? (bold mine)

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.

U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15 percent pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow (Z). Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.

People buying more than their income means acquisition through debt financing or increasing exposure on leveraging.

This shows that extended price gains of any assets can only be fueled by credit expansion.

Euphoric or manic (frenzy) actions signify a reflexive feedback loop between expectations shaped from (rising) prices and outcome as a consequence of (buying) action. Such is the yield chasing phenomenon financed by debt. 

As one would note, US stocks and real estate, which are titles to capital goods, have been booming even when statistical economic growth continues to wobble. The annual growth rate of the US economy has hardly topped the 2000 and 2004 highs.

So like elsewhere we are seeing “parallel universes” or price-reality distortions which are symptoms of bubbles.

Pimco’s chief Bill Gross mostly shares my view of a global pandemic of bubbles—as quoted by Zero Hedge (bold original)

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well.

The only difference is that Mr. Gross seems to downplay or soften on the repercussions, perhaps out of political correctness.

Yet if every action has an equal and opposite reaction then for every boom is a corresponding bust. Ramifications will certainly not be pleasant.

If central banks continue to inflate amidst a bursting the bubble, then the bust morphs into an inflation/currency crisis.