James D. Shilling, the George L. Ruff Endowed Chair in Real Estate Studies at DePaul University,
A decade has passed since a massive U.S. housing bubble triggered the 2008 financial crisis. Could another housing bubble be brewing?
We asked James D. Shilling, the George L. Ruff Endowed Chair in Real Estate Studies at DePaul University, who researches housing and real estate investment trends. A prolific scholar and sought-after speaker at academic and business conferences around the world, Shilling recently discussed the prospect of another housing bubble at the World Knowledge Forum in Seoul, South Korea. Here, he discusses his findings and gives his take on other real estate trends.
What trends are affecting the current housing market?
Global economic growth slowed in late 2018 and early 2019. One factor negatively affecting global growth has been the down cycle in technology (for example, a low demand for iPhones). Another factor has been the slowdown in credit in China and the trade conflicts with the United States. Europe—and, more specifically, Germany, the world’s leading exporter by most measures—has also been affected by trade tensions. There also is uncertainty over politics in Europe (for example, Brexit). Finally, that growth in the United States slowed is no surprise. The U.S. grew quite quickly in the first half of 2018 on the back of a large fiscal stimulus, and the effects of that stimulus are starting to wear off.
These factors generally caused most housing markets worldwide to cool in late 2018 and early 2019. Nevertheless, lower 30-year fixed-rate mortgage rates in the U.S. (which have recently dropped to 4.2%, a drop of more than 0.75% since late 2018) are likely to lure many buyers back into housing markets in the U.S. for the remainder of the year.
Are we due for another housing bubble?
If you look at what happened during the last crisis, housing prices in real terms increased about 70 percent from 2002 to 2008. Then they fell by 30 percent from about 2008 to 2011. If you apply that same criteria to housing prices today, Beijing, Shanghai, Hong Kong and San Francisco all meet that criteria for a bubble—real housing prices have grown by more than 70 percent in those markets since 2008. And markets on the brink include London, Los Angeles, Zurich and Boston. Interestingly enough, however, Chicago and New York City have been laggards in terms of real housing prices. In New York City, the high end of the market has really declined significantly over the last 12 to 18 months.
So, the data presents a picture that in some places prices are going through the roof, other places are on the brink, and in still other places, such as Chicago, we aren’t seeing that big an increase. The short answer is that it doesn’t look like a bubble will cause a crisis because housing prices are not affecting all places in the same way.
On top of that, in order to have a bubble, there also needs to be some sort of speculation taking place. If you go back 2002-2008, we saw a lot of people doing that. People bought homes and they didn’t do anything with them – they just kept them vacant and then tried to flip them. We saw that in Chicago and almost everywhere. But the only place where you are seeing that now is in Asia. In places like South Korea, about 20 percent of households are looking to flip.
We’re also seeing very little new housing starts (new residential construction projects) and existing home sales here in the Midwest as well as the East and West coasts. People have low interest rates. Four or five years ago the rates were 2.75 to 3%, and now it’s about 5%. So people are thinking about whether they want to give up their favorable financing to take on something new. We’re starting to see more improvements to existing homes instead.
What other factors make the current housing market different?
While many families were struggling to make their mortgage payments just before the Great Recession, debt to income levels and delinquency rates are currently much lower than they were prior to the bust. Households are holding significantly less mortgage debt and are making their monthly mortgage payments at a much higher rate than during the Great Recession.
Why are housing prices at bubble level in some cities but not in others, like Chicago?
I think the answer involves economics in general and where the shared economy and technology impact the economy. If you look at places like San Francisco, which is driven by technology, for people in the top 10 to 20th percentile, the ratio of housing prices to incomes is about 2 to 2.5 times. For that segment of the population, the prices are pretty reasonable. For everybody else, it’s hugely unaffordable. Then you look at Chicago. We haven’t benefited as much as San Francisco in the technology-driven economy, and so we won’t necessarily expect to see the huge prices we’ve seen in places like San Francisco, Boston and Austin, or in Hong Kong, Beijing and Shanghai.
The issue of housing affordability speaks to the work of the Institute for Housing Studies at DePaul. As much as we thought affordable housing was an issue in the 2000s, going forward it’s going to be doubly important because income inequality is not going away. It’s tough to put technology back in the bottle and reverse these trends.
How might things have changed in Chicago if the city had been chosen for Amazon’s second headquarters?
Having Amazon located in the city would have been both a blessing and a curse. The blessing is that it would have created a ton of jobs in Chicago. The curse is that it would have moved us to become more like San Francisco – higher prices on housing overall because the incoming workforce would have lowered supply and raised housing prices.
Read the latest report from the Institute for Housing Studies on the State of Rental Housing
By Robin Florzak
