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Cool It Already: Housing Costs Are Only Slightly Above Historic Norms

According to Don’t Buy the Bubble Talk [SmartMoney.com] [1] “housing costs are now only a bit above historic norms, and are not extreme even in boomtowns like Miami and San Diego.”

According to a study completed this fall by Todd Sinai of Wharton School, University of Pennsylvania, Chris Mayer of Columbia Business School and Charles Himmelberg of the Federal Reserve Bank of New York, homeownership costs are near the long-term average, relative to rents and incomes.

Download the study [pdf] [2]

Traditional measures of housing values, such as the rate of appreciation, or the house-price-to-rent ratio, are misleading.

“The study by Sinai and his colleagues examined 46 housing markets from 1980 to 2004, estimating the true one-year cost of owning a house and comparing it to rental costs and income levels. Naturally, the low interest rates of recent years have offset high prices by keeping mortgage payments down. Variable and interest-rate-only mortgages have also lowered the annual dues of homeownership.”

“It’s tricky; economists think about bubbles differently from how lay people think about bubbles. [Rapidly increasing prices] is not the definition of a bubble… You could have a big price change without it having been a bubble. “

This study reflects the way people have been viewing housing as an asset class. People have been purchasing based on payment, not price in this latest boom.

What has bothered me about the real estate market and whether or not there is a bubble seems to have two camps:

From one extreme: there is a bubble:

Prices are rising so fast that housing is going to crash. This is what I was referring to last week with my post on bubble blogs [Matrix]. [3] These are well written blogs and are based on the basic principal that prices are going to high too quickly.

To another extreme: there is no bubble:

Prices have been showing such strength over the past few years and demand so high that there is no bubble. This is a classic case of using historical to prove current conditions when the past does not take into consideration what is happening right now.

Extreme conclusion: there are many that are passionate about both arguments.
Are we sure that there has to be an extreme conclusion to all of this, or does it simply make for better reading?