House prices are in a bubble

Rapidly rising housing prices in the US has led to talk of another housing bubble like the one that helped trigger the financial crisis a little more than a decade ago. Consider that the Case-Shiller National Home Price index has gained in excess of 6% per year on average since January 2012, while net rental income has barely kept up with inflation, increasing just less than 2% per year. The result is that home prices seem as overvalued as they were in the spring of 2005, nine months before the peak. One way to measure home valuations is with a cyclically adjusted price to earnings (CAPE) ratio developed by Yale University professor and Nobel Laureate Robert Shiller for stocks. The concept can be applied to a broad swath of assets by dividing the current price of an asset by the average annual inflation-adjusted earnings over the prior 10 years. Stock valuations soared in the late 1990s, only to crash from 2000 &ndash