D.R. Horton, Inc. (DHI), KB Home (KBH) & Discussion of a New Bubble In Housing?

There was great news for the housing market this morning.

Or terrible news, depending on how you interpreted it.

Nationwide housing prices grew 9.3% in the 12 months ended February, according to the S&P Case-Shiller Housing Index. That was the biggest annual gain since 2006, when the housing bubble peaked.

This is excellent for homeowners, especially those underwater on their mortgages. But it’s scary for those who think it signals a return of the housing bubble that did so much damage to the economy. And there were plenty of them.

“The Second Housing Bubble Continues to Inflate,” wrote Business Insider.

“Presenting: The Housing Bubble 2.0,” wrote the blog Zero Hedge.

Please. Calling this a housing bubble is dangerously premature.

As Warren Buffett says, “Price is what you pay; value is what you get.” Just as stock prices surged in 2009 without pushing valuations to extremes, rising home prices don’t necessarily indicate mania in the housing market.

There are a few ways to measure home values, rather than simply home prices.

One is the inflation-adjusted price over long stretches of history. Yale economist Robert Shiller calculates this data going back to the late 19th century:

Source: Robert Shiller. Data through Q4 2012.

Far from bubble territory, real home prices are pretty close to the historic average. And this may even be overstating the case, since the average square footage of American homes has increased tremendously over the past few decades.

Another is the ratio of home prices to average rents. Here too, “up” doesn’t put us anywhere near “bubble”:

To put some numbers on this, a ratio of nationwide home prices to rents I calculate with Professor Shiller’s data and the owners’ equivalent rent portion of the Consumer Price Index is now almost exactly equal to its average since 1987, which is the farthest back we have good data for. If you think current prices look bubbly, then you implicitly take the position that we’ve been in a bubble for more than a quarter-century. Which is just cranky.

Or take home prices measured against average incomes:

Sources: Robert Shiller, Census Bureau, Sentier Research.

Here too, it’s kind of obnoxious to call this a new bubble.

Finally, we might call the housing market a bubble if a growing share of Americans were becoming homeowners, as lending standards dropped. But the opposite is occurring. According to the Census Bureau, the homeownership rate is now at the lowest level since 1995.