As the chart above shows, nationwide housing prices are only about 8% below their 2006-2007 highs, and prices are up 4-5% over the past year. It won't be long before housing prices reach new nominal highs.
Housing prices feed into the CPI via "Owner's Equivalent Rent," which is the BLS's estimate of how much homeowners would be paying to rent the house they own. Rents don't always track home prices, of course, but over time there is a strong tendency for rents to track prices. As the chart above shows, prices have outpaced rents since 1987 by about 30%. With prices rising 4-5% a year, it's a good bet that rents are going to keep rising, and probably at a faster pace than we've seen in recent years.
As the chart above shows, rents have been rising a little more than 2.5% per year. The chart also suggests that, given the increase in home prices to date, rents are likely to rise by at least 3% in the next year or so. The chart further suggests that there is a lag of about 18 months between home prices and rents, with prices leading rents. Since OER constitutes about 25% of the CPI, this is going to be an important source of rising inflation in the next year or two. More and more, it is looking like deflation is a thing of the past.
In inflation-adjusted terms, housing prices are still about 25% below their 2006 highs. A return to the inflation-adjusted levels of 2006 would be symptomatic of another housing market bubble. We're not there yet, and probably won't be for quite a few years. But if current trends continue, another bubble looks more likely than another crash.
Mortgage rates are very near their all-time lows. Low rates plus increased confidence could easily drive home prices higher. Even if mortgage rates were to rise, that is no reason to worry about housing. Housing has thrived under much higher rates than we have today. Higher rates would likely be symptomatic of a stronger economy and rising confidence, both of which would be supportive of higher home prices.
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