Is There Really a Housing Bubble?

To many, the housing bubble seems a foregone conclusion. Uncountable blogs devoted to the bubble give the impression that you must be crazy or stupid to not see it. In spite of this, I remain unconvinced. I’m not even sure I know what the “housing bubble” is.

Here is a working definition:

…that housing prices have been pushed well beyond any semblance of reasonableness and the dictates of healthy market fundamentals due to excessive liquidity, extremely relaxed lending standards, a speculative mania, and the increasingly irresponsible "cheerleading" of vested interests.

Endless scary graphs, like this one, which shows Phoenix appreciation rates over the past 30 years, seem to bear this out. Nonetheless, I am left with questions.

For example, who decides what price is “reasonable”? What standard should we use? Value is entirely subjective. Price, being a function of value plus ability to pay, can seem “unreasonable” to some, but “very reasonable” to others. The only one that matters, though, is the person who actually buys—and who, in so doing, reveals his opinion that the price is “reasonable.”

Where is the evidence of a “speculative mania”? You can’t simply point to the recent rapid appreciation rates and say, “See?”, because that’s assuming what you’re trying to prove. What evidence I’ve seen for this has been sparse and unconvincing, so far. Of course I could be wrong, and we could be on the precipice of the largest housing price decline in history. Unfortunately we’ll only know in retrospect.

The charge of “excessive liquidity” and “relaxed lending standards” also rings hollow to me. Now, it seems certain that the amount of borrowing taking place has increased significantly, but that could be caused by any number of things. Why does this automatically mean that lenders have become “extremely relaxed” with their money—which I presume means they’ve suddenly become willing to lend to any fiscally irresponsible idiot, as long as he has a heartbeat? This seems a testable hypothesis to me. If such an explanation were true, wouldn’t you expect to see foreclosure actions increase over time, as the bad debtors began defaulting on their loans?

When debtors default on their loans, lenders need to provide public notice of the impending sale of the property. These notices get recorded at the county recorders office, usually in the form of a Notice of Trustee’s Sale. In order for a lender to record a Notice of Trustee’s Sale, a borrower has to be at least 90 days late on her mortgage payments. Luckily, Maricopa County makes these records easy to obtain.

This graph shows data I’ve compiled from the Maricopa County Recorders office. The blue line is the number of Notices of Trustee’s Sales per month, over the past 11 years. The dotted red line is a 3-month moving average. What does this graph tell us? My first impression is that it’s easy to see evidence of the 2001 tech bubble, but, if anything, Maricopa County seems to have recovered from that, as the average number of notices has returned to 1996ish levels.

Admittedly this one graph is hardly a death-blow to the idea of the bubble, but I believe it’s important to take note of it, if for nothing else, then at least as a caution against our tendency to succumb to Chicken-Littleism and confirmation bias.