Does the Fast Rise in Home Prices Equal a Bubble

The fast rise in U.S. home prices has some in the housing market murmuring the dreaded "B" word. New numbers out Monday only add to that "bubble" hypothesis. The nation's top 10 and top 20 market composites on the latest S&P/Case-Shiller Home Price Index recorded their highest annual growth rates since May 2006 -- up 8.6 percent and 9.3 percent respectively. "It is a solid rebound," said S&P's David Blitzer in an interview on CNBC. "I would not call it a bubble, but I'll admit a bubble is one thing you don't see when you're in it. You only see it after it occurs."

Looking back on the index, the biggest home price jumps were in 2004 and 2005, when values were up as high as 16 percent annually. Those prices were fueled by cheap and easy credit, which certainly does not exist today. They were also fueled by speculators who bought and flipped homes at a fast clip, putting no skin of their own in the game.

The concerns today are in certain local markets where gains in home prices look meteoric. In Alameda I checked median home prices for Q1 of 2012 vs. median home prices for Q1 2013 and saw prices rose 19 percent, but you have to put that in perspective. From the peak of the housing boom to the trough in August of 2011, home prices fell over 35% percent. Home prices are approaching their peak levels in 2007 in some cases.

The difference this time around is that the investors are not flipping homes as much, they are holding them to rent. They are also using mostly cash, and therefore they have all their skin in the game. The reason prices are rising so fast? There is very little to buy and demand is coming back. Inventories are down significantly across the nation, and even in the supposedly busy spring season, fewer new listings are coming on than normally do this time of year.

"From my perspective, prices have not gotten out of line with incomes yet," said Eric Belsky of the Harvard Joint Center for Housing Studies. "When you look at the extent to which prices fell and they've come back, while some of the double-digit gains are sort of eye-popping, both the fundamental price-to-income level and when you layer in mortgage interest rates, I don't see any market being that frothy or that inflated now."

The East Bay in general is very hot right now. Alameda, Oakland and Berkeley remain highly desirable and have been drawing people who cannot afford to live in San Francisco for years. That and the quality of life issues; schools, backyards, access to public transportation keep these cities desirable.