Housing bubble? Define bubble...

Is Rebound in Housing Creating Another Bubble?

I have to admit, I've been thinking there's a bit of a bubble in housing.  After watching this video, I guess it really boils down to your definition of a bubble.  Home prices are up, which is good, but they never really got back down to the long-term trend.  And I've actually seen people complaining that 6% or 8% rise in home prices in a year isn't good enough. The truth is that the real estate market is being manipulated.  It is artificially high.  But, it could be okay this time because there's not the same air of speculation going on that there was a few years ago.  Still, home prices have been propped up by the Fed, as well as the federal government, and given that the federal government is trying to find places to cut spending, I might be a bit leery of their continued support of the housing market.  And what would happen if there were no deduction for mortgage interest?  With that deduction, the rent vs. buy decision may favor buying, but take that deduction away and does it still?  I don't know.  I don't expect anything bad in housing soon, but it wouldn't really surprise me to see a substantial drop in a couple of years, and maybe sooner depending on how the spending debate goes in Washington.

Invest in real estate?

What John Paulson Says Is the Best Investment Now

In my opinion, John Paulson is an example of how someone can get lucky, and no matter how badly they do later, the public will remember him as some sort of visionary.  Being a homeowner, I would really like to believe what he says... then again, he made billions short-selling mortgages in 2007, and I'm sure he wasn't busy telling people what a terrible investment mortgages were then.  I am, though, somewhat comfortable with the housing market over the next couple of years.  I'm mostly worried about what's going to happen when the Fed starts raising interest rates or the federal government decides to cut the home ownership tax credits and deductions.  I still see the real estate market as being artificially inflated.  So, the decision to invest in real estate really depends on how much confidence you have in the government and the Fed.  I don't have that much confidence, but I'm also not going to sell... YET.

Housing

According to the news, the majority of analysts seem to think that housing has bottomed out.  So, I downloaded the Case-Shiller index data here, and made a neat little graph.

It kind of looks like it might have bottomed... oh, wait.  If you can look at the index further back (like here) you'll be able to see that the index generally tends to revert back to whatever its normal level is.  After World War II, that level does seem to have risen, but as someone pointed out in the comments on the page, houses have gotten bigger... well, there could be a number of explanations for that.  The point is, there doesn't really seem to be a reason for there to be a new, higher, "normal" price for homes, as this chart seems to indicate.

The flattening out from 2009 on in this chart is simple to explain: the Fed has kept mortgage rates exceedingly low, and the federal government has instituted tax credits for buying homes.  These things have certainly put a floor on home prices (much like the floor our government puts on milk prices), but I would hardly call this any sort of bottoming out.

The big question in all this to me is whether the government will continue to support home prices long enough for people to forget what a "normal" home price is, and make this the new normal.  Or, will they just keep on manipulating the home prices upward until it's 2006 or so, all over again.