Real Estate Prices Near 2006 Levels or Are They?

Here is some food for thought for those of us who are worried that we might be in the midst of a new real estate bubble. The average home price in the United States is now close to what it was in 2006, the National Association of Realtors, or NAR, reported.

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At the peak of the Great Real Estate Bubble in July 2006, the median price for a single-family home in the USA was $230,400. The average price for a home in May 2015 was $228,700, CNBC reported.

What’s even more interesting is that the average home price in the U.S. could soon exceed the 2006 peak, the NAR’s Chief Economist Lawrence Yun told CNBC. What is truly astounding is that Mr. Yun went out of his way to say, “This is clearly not a bubble.”

Inflation Proves It Is Not 2006 All Over Again Yet

Now for the fascinating part of the story: Yun is correct. The situation is not a bubble—yet—because of the rate of inflation. According to the U.S. Bureau of Labor Statistics’ CPI Inflation Calculator, $230,400 in 2006 dollars equals $271,777.14 in 2015 dollars. That means the median home price would have to rise to around $272,000 to exceed the 2006 level.

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We are nowhere close to the bubble price level and are not likely to reach it again for quite some time. The average home price would have to rise by around $45,000 to reproduce the 2006 prices, and that is not likely to happen. Housing prices are rising, but nothing like a nationwide housing bubble is underway.

Is the Housing Market Depressed?

What’s truly worrying is that some of the figures Mr. Yun cited show that the real estate market is still depressed and has not yet recovered from the 2007 meltdown. These figures he rattled off to CNBC prove that a real estate recovery has not yet reached most American neighborhoods:

  • The demand for new housing is 25% lower than it was 10 years ago. The major cause for this is probably income inequality; people simply do not have the money to buy a new house.

 

  • The amount of new home construction is still 50% less than it was in 2006. That too is a strong indication of income inequality; large numbers of people cannot afford the mortgage necessary for a new home.

 

  • The amount of mortgage debt is about 10% lower. That probably means mortgages have been paid off and some debt has disappeared because of defaults.

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Even in areas like the San Francisco Bay Area, where prices are high, the rate of home sales is below the long-term average, Core Logic research analyst Andrew LePage told CNBC. The volume of home sales in the Bay Area was actually 3% lower in May 2015 than in May 2014. That is a strong indication that average buyers have been priced out of the market by an average home price of around $650,000 in the region.

The home prices in the Bay Area are near the peak levels they hit in 2006, which means that region is in the midst of a real estate bubble that could collapse soon. That does not mean a nationwide real estate bubble is coming.

The Median House Price Could Soon Fall Again

A more likely scenario is that the collapse of the bubbles in areas like Denver and the Bay Area will drag down real estate prices nationwide and further depress the market. A real estate market collapse is likely, but it will not be a bubble; instead, it will be deflation as housing costs fall because of lower demand. The factor most likely to trigger that event would be an increase in mortgage interest rates.

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My prediction is that we will not see a true real estate recovery until around the year 2020. Instead, we’ll see median house prices fall or stagnate for the next few years as realtors struggle to find buyers and keep prices up.


Another force affecting the market is the unavailability of mortgages. It was easy to get mortgage credit that drove the great boom. Today mortgage credit is in short supply largely because interest rates are low, which gives lenders a strong incentive to stay away from the mortgage market.

The housing market is being depressed by outside forces, namely the lack of potential buyers created by income inequality and the shortage of mortgage credit driven by low interest rates (currently around 4%). That means we will not see a real estate recovery occur until one of two things happens: either a sharp increase in interest rates, which would expand the mortgage market, or a significant jump in average incomes. Since neither of those events is likely, expect home prices to stay depressed for the foreseeable future.