By Bill McBride
On Friday, I posted five economic questions I’m frequently asked. I’ll post some thoughts on each of these topics over the next couple of weeks.
A common question is: Are house prices in a new bubble? My short answer was: No. Here is an explanation.
First, we need to define a bubble. Way back in April 2005, when I was very bearish on housing, I wrote: Housing: Speculation is the Key. From that post:
I have taken to calling the housing market a “bubble”. But how do I define a bubble?
A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation – the topic of this post. Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the “bubble” bursts.
First, on valuation: two key measures are house prices to income, and real house prices. The Census Bureau released the Income, Poverty and Health Insurance Coverage in the United States: 2016 in September. The report showed a significant increase in the real median household income:
NFTRH Premium for your 50-70 page weekly report (don't worry, lots of graphical content!), interim updates and NFTRH+ chart and trade ideas or the free eLetter for an introduction to our work. Or simply keep up to date with plenty of public content at NFTRH.com and Biiwii.com. Also, you can follow via Twitter @BiiwiiNFTRH, StockTwits, RSS or sign up to receive posts directly by email (right sidebar).
The U.S. Census Bureau announced today that real median household income increased by 3.2 percent between 2015 and 2016 … Median household income in the United States in 2016 was $59,039, an increase in real terms of 3.2 percent from the 2015 median income of $57,230. This is the second consecutive annual increase in median household income.