Dear Fed, It's Not "Really Hard To Spot Bubbles"

Tyler Durden's picture

Authored by Wolf Richter via, 

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

The S&P CoreLogic Case-Shiller National Home Price Index for March was released today. It jumped 7.7% year-over-year, far outpacing growth in household incomes. This has been the case for years. In fact, real household incomes are almost back where they were in 2006 (/sarc). So what could go wrong?

At 198.26, the index surpassed the peak of Housing Bubble 1 in May 2006 by 11% (data via FRED, St. Louis Fed):

Since everyone called it a housing bubble after it had imploded, even Kashkari, today’s phase in the wondrous market is Housing Bubble 2, no?

The other day, Zillow reported that the national median home value in April rose 7.3% year-over-year to $198,000. It too beat the peak of Housing Bubble 1 ($196,600) set in April 2007. “It only took a decade,” Zillow said.

The National Association of Realtors reported that the median price in April hit $246,100, which is 6.8% above the peak of Housing Bubble 1 ($230,400 in June 2006).

The Case-Shiller Index appears to have more stature at the Fed than Zillow or the NAR. So we’ll use it here in our visual aids for the Fed.

It is based on a rolling-three month average; hence, today’s release was for January, February, and March data. So it’s always behind. Instead of median prices, it uses “home price sales pairs,” for example, a house sold in 2011 and then again in 2017. Its algorithms adjust this price movement over the years and numerous other factors into a data point that becomes part of the index. The index was set at 100 for January 2000. So an index of 200 means prices have doubled in the past 17 years.

Housing is local. Therefore housing bubbles are local. But if enough of them come together at the same time, the housing bubble takes on national proportions. This is the phase, as the above chart shows, that the US has now reached: In some metros, prices are still below the peak; in other metros, prices are setting new records. Overall, prices have surpassed those of Housing Bubble 1.

So dear Fed Governors, please have a look at some of the beautiful housing bubbles around the country. As you’ll see, they’re really not “hard to spot.”

This is the Boston metro, where the current home price index is now 9% above the peak of Housing Bubble 1 (Nov 2005):

Prices in the Seattle metro have surged even more, pushing the index 13% above the peak of Housing Bubble 1 (Jul 2007):

And here’s Denver’s house price bubble, where prices have soared a breath-taking 38% since the prior peak (Aug 2006):

I know that folks in the Dallas-Fort Worth metro felt left out during Housing Bubble 1. I heard many complaints about that at the time. They also missed out on much of the house price crash.

But they sure know how to make up for things. Home prices have now surged by 37% since the last peak in June 2007:

The Atlanta metro isn’t quite back to the peak of Housing Bubble 1, but it’s near-perfect V-shaped bubble recovery will soon hit it:

For the Portland house price bubble, the index is now 14% above the prior peak:

The Case-Shiller Index for San Francisco, which covers the five-county Bay Area, is now 7.7% higher than at the peak of Housing Bubble 1. However, in the city (and county) of San Francisco, the median home price has soared 47% above the prior peak (Nov. 2007). This is the chart for the five-county Bay Area house price bubble-crash-bubble:

The city of San Francisco is also the first city in this lineup where the median home price is now heading south on a year-over-year basis. During Housing Bust 1, the City was late to react. This time, it seems to be ahead of the pack.

And the Case-Shiller index for the condo price bubble in New York City has soared 17% above the prior peak (Feb. 2006), with prices nearly tripling since 2000:

The local housing bubbles across the US blew up with spectacular consequences, all in their own time frames. Plenty of local home price bubbles are now coming together to form a national home price bubble. So it’s really not hard to spot them, Mr. Kashkari.

Sure, there has been some inflation – 17% since 2006, based on the Fed’s favorite core PCE measure. Home prices in some of the cities have already reached a new peak even after inflation. And besides, it’s not a housing bubble until it reaches the inflation-adjusted point where the prior one took down the financial system? Is that the point when Housing Bubble 2 begins, instead of ends? If so, what would Housing Bust 2 look like? A vision too ugly to behold.

What’s hard to predict is the moment when housing bubbles begin to deflate. With monetary policies still in easing mode, with the federal government subsidizing the housing market in numerous ways, and with homes having become a securitized asset class for global speculators, house price bubbles can inflate – as we have seen – far more than a rational human mind might think possible. But we do know that they will deflate.

In San Francisco, the signs and numbers are already lining up. Read…  Will these 2 Forces Crush San Francisco’s Housing Bubble?

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Sonny Brakes's picture

Everyone's walking around saying 'fuck you, pay me'.

Delving Eye's picture

And when it bursts, it will be a bubble bath.

Sonny Brakes's picture

That's the trouble, there's always a pin for every bubble and if they're going to do something, they'd better make it soon because there's a lot of pins looking out for balloons.

BullyBearish's picture

"nobody, NOBODY saw it coming...", said the A$$HOLE

Thinkpad's picture

It is futile to fight against something if one does not know what one is fighting for. The hardest thing to explain is the glaringly evident which everybody had decided not to see. A. Rand

 Wash rinse and repeat of comment I made to this 10 hours ago somewhere else. The opnions expressed were entirely his own and not in any way reflective of the Fed. He also articulated that since the irrational exuberance backlash of Greenspan made the Fed more cautious about commenting on markets and perceived asset bubbles. If you will recall earlier in the year when Yellen was asked in the question and answer period after Fed meeting about stock prices she ignored the question.

Endgame Napoleon's picture

People cannot see what they do not want to see.

DennisR's picture

Not sure how this bursts if all what the bank has to do is get printed money from the Fed and take possession of the home upon foreclosure?   Bank then rents the home out. 

Thinkpad's picture

Wrong banks are not in the landlord business they resell them all banks have a foreclosure portfolio you are welcome to bid on. In this last go around in '08 Blackstone and Apollo bought massive amounts of foreclosed homes. Jeeez were you under a rock in '09 this was not a secret

Blackstone Going Public with a $10 Billion Bet on Foreclosed Homes
oDumbo's picture

House prices flatten when for one reason or another, you can't swing the monfree.

gold rubeberg's picture

Hahaha ... stupid Fed people need help spotting a bubble ...

Thinkpad's picture

no that isn't what he said if you had read the article. He said in effect the cure was worse than the disease and the Fed was not in the asset bubble bursting business essentially and fixing one problem created even bigger problems in other parts of the financial ecosystem. And the views he expressed were his OWN not the views of the Fed. Who looks stupid now. Open wider so we can fit your other foot in your mouth.

Russdiamon's picture

Sure seems like the market isn’t going to be staying up here forever. Interesting, since this guy has been calling for a top on the market lately. He’s got a great track record at calling tops, and drops in general. Worth taking a look at. Check it out

Thinkpad's picture

ZH-Tyler I'm pretty sure the Fed has access to the same info and data you do and THAN some. I read his essay this morning and in my view you really took it out of context and he specifically stated it was his OWN opinions so don't be implying it's Fed talk. Here's a hint for you I have a lot of really interesting LinkedIn connections. Enough said.

gimme soma dat's picture

LinkedIn connections?  Oh no.  You really told them.  

Thinkpad's picture

All I meant by that is I read his article this morning when it was released and unless ZH read a different essay than the one Neel published this morning the ZH analysis was taken completely out of context if you read the essay. call me old school you punk but I'm discreet about who I know and lack there of will find you pretty alone a room full of thought leaders. Actually LinkedIn is a lot better than the National Enquirer of the financial world better known as ZH. gimme soma dat you can kiss my ass dumbfuck.

Reality Creator's picture

It serves the fed's needs to say they can't see a bubble much less one popping until it has popped. The fed doesn't want to call it and precipitate a sell off when they know a sell off is going to happen anyway: why look bad setting it off? They also want to party as long as possible.

The fed also wants to have the bubble burst to benefit the wealthy over the masses whereby everyone loses money, but the ratio of wealth between the rich and the poor is increased: wealth exists only when some (a very few) have a lot of money and the rest (a huge majority) have only a little money. If everyone had the same amount, no one would be rich or poor...The fed doesn't want to see the bubble bursting in advance because they would be expected to mitigate the worst consequences which would benefit the masses at the expense (literally) of the wealthy.

Thinkpad's picture

That contradicts the entire Obama legacy the last 8 years. Another who probably has not read the essay and completely misses the point of what he said. Did you read the essay by any chance? No? I thought not. Read and then opine that is the way intelligent people act.

Blankfuck's picture

Bubble Bubble in the air Bubble Bubble FED RESERVE FUCKERS DONT CARE!

NO WORRY! NATIONAL FED FUCKERS DAY is in June! Its when interest rates rarley and hardly adjust.  Any pull back just buy the fucking dip! These FED FUCKERS are ruling the stock markets bond markets every market! Its part of their Ponzi Plan, you know the trillions in debt bag holder american little people have to pay back. Yes all debt down the road it was pushed! No worry, not one fed fucker arrested as yet. Ponzi continues!

Thinkpad's picture

Go to your room you used the word fuckers more than you actually said anything. Time out junior. 

ElTerco's picture

There *is* one key difference in the San Francisco district. In 2008 through 2012, rents were about $1000/month where I live. Now, rents are around $2000/month. That creates a floor that wasn't there last time. As you may know, rents go up "easily", but are very slow/stubborn on the downside.

Central Ohio's picture

Around 2008 + or -, the house flipping adverstisements were on TV.  The ads are back in Central Ohio.  (Can't say to much, we got sucked into it in the last go 'round.)

Russdiamon's picture

Sure seems like the market isn’t going to be staying up here forever. Interesting, since this guy has been calling for a top on the market lately. He’s got a great track record at calling tops, and drops in general. Worth taking a look at.

Check This Out