In a paper entitled ``U.S. Housing Prices: Is There a Bubble?'' Labonte documents episodes of ``a sharp prolonged increase in house prices, followed by a significant and prolonged nominal decline'' in California, Texas and New England.
After a six-year, 170 percent increase, New England house prices fell 12.9 percent from the first quarter of 1990 to the first quarter of 1995, Labonte says. The bust never matches the magnitude of the bubble.
Both New England and California are among the frothiest local housing markets currently.
``Every housing market in which prices increased by more than 70 percent in the past five years was located in California, New England or New York,'' Labonte says.
Another piece of good news is that when higher mortgage rates eventually slow housing demand, typically it's turnover that drops rather than prices.
Then again, prices haven't ever been this extended. In inflation-adjusted terms, house prices rose about 1 percent annually before the third quarter of 1997 and about 5 percent a year since then, according to Labonte.
In nominal terms, the price appreciation is eye-popping.
``The 9.4 percent increase in median prices for existing homes is the biggest two-month increase on record, and no one is talking about it,'' Carson says.
A rise in home prices isn't inflationary for the simple reason that they were taken out of the consumer price index some 20 years ago. Out of sight, out of mind.
The Bureau of Labor Statistics currently uses a survey of rental units to impute the value of a home (the service that a home provides).
If the CPI were computed the old way -- using house prices instead of an imputed rental value -- the June and July CPIs would have increased by an average of 0.9 percent each month.
Is this another case of rising asset prices flying under the radar of measured inflation?
Always and Everywhere
Asset price inflation is a symptom of overly expansive monetary policy. Money is the fuel. Sometimes it chases goods and services. Other times it chases assets, which is what it did in the late 1990s (stocks) and what it appears to be doing now (real estate) in response to super-low interest rates.
``Speculation can only occur when you have an over-expansion in money and credit,'' Carson says.
When long-term interest rates started to rise from 45-year lows in June, potential homeowners made a beeline for adjustable- rate mortgages. According to the Mortgage Bankers Association, the volume of mortgage applications for ARMs soared to almost a quarter of the total last week, up from 13.4 percent two months ago.
``In addition to taking on property risk -- a bet that prices will rise -- homeowners are taking on interest-rate risk as well,'' Carson says.
Eventually short rates will have to rise, and long-term rates will rise further. At that point we'll find out if the re- allocation of capital to housing was a misallocation.