Asymmetrical Information - Megan McArdle

03.21.13

Housing is Coming Back. Is it Sustainable?

Builders are jumping in as the bidding wars start back up.

"Sudden rise in home demand takes builders by surprise."  That's the headline on a New York Times story this morning.  

This seems like good news: finally, the recovery we've been waiting for.  But there's something disquieting about it.  

There is good reason for prices to rise: inventories are at record lows all around the country. In my neighborhood, a fairly desireable place by the standards of adventerous young DC couples, there was exactly one open house this weekend.  But at the same time, this is a puzzle.  If prices are rising, why are inventories falling?  And why are people bidding up the prices of housing again, instead of, y'know, renting?

In many areas, builders are scrambling to ramp up production but face delays because of the difficulty of finding construction workers and in obtaining permits from suddenly overwhelmed local authorities. At the same time, homeowners — many of them lifted above water for the first time in years — often remain reluctant to sell, either because they want to wait and see how much further prices will climb or because they are afraid of being displaced in the sudden buying frenzy.

“You see a home go for sale and within a couple days there are three, four, six offers,” said Carrie Miskawi, a mother of three young children who has been looking for a new home for the last six months with Mr. Colgan’s help. She and her husband have decided not to put their current home on the market because they fear it will be snatched up before they have a chance to bid successfully on a new one.

Bidding wars like these--and DC has a lot of them--are bubble behavior.  Fine if you're in North Dakota, but it's harder to explain in Sacramento, where the major business is a very cash-strapped state government.  It's hard not to wonder if the Fed's current low, low interest rate policy isn't touching off another little mini-bubble--not as destructive as the last one, but likely to leave some couples hurting when rates rise and prices fall.

Am I being too much of a worrywart? Maybe.  But the trend of the last decade or so is that Fed loosening seems to show up less and less in general prices, and more and more in financial assets, or quasi-assets like housing.  The stock market is booming, and the housing market is booming, even though GDP and unemployment haven't recovered.  I'm not saying that this is definitely a fool's rally.  But as I say, I am disquieted.