S&P/Case-Shiller Creator Says Phoenix and Las Vegas ‘Clearly in Bubbles’

I was waiting for the bubble chatter to heat up, and it looks like it’s finally about to.

Karl Case, one of the creators of the closely watched S&P/Case-Shiller Home Price Indices, told Bloomberg that both desert cities are “clearly in bubbles,” as both have seen the largest home price gains since the height of the previous boom.

Unfortunately, last time that happened prices came crashing down in a hurry, though that was certainly a different time, and a different housing market.

Still, if one half of the Case-Shiller duo is telling you something so ominous, you ought to listen.

In May 2013 (latest data available), the 10- and 20-City Composites recorded annual price increases of 11.8% and 12.2%, respectively, which were the strongest year-over-year gains since March 2006.

Vegas and Phoenix Have Been the Biggest Winners

The biggest winners include San Francisco (+24.5%), Las Vegas (+23.3%), and Phoenix (+20.6%).

But only the latter two seem to be bubble concerns, at least according to Case and other economists. They’re certainly in two different categories, with San Francisco protected by its unique geography, and the desert cities the complete opposite.

In both Vegas and Phoenix, developers have the opportunity to continue building out forever and ever, or so it seems. That’s not a very good buffer for home prices.

However, at the moment it’s a lack of inventory that has propped up prices, though that could all change very quickly.  And Case seems all too aware, remarking that “What can go up can go down — real quick.” And gone up it has.

Investors Doubling Down

Bloomberg cited two ridiculous examples, including a five-bedroom house that sold for $499,000 in Las Vegas last month, double the price it went for just three months earlier.

In Phoenix, a similar property went for $600,000 this month, chalking a remarkable $273,000 (+84%) gain since March. Both properties were flipped by investors for tidy profits.

With examples like this, it doesn’t take an economist to call a bubble, mini bubble, or whatever you want to call it. It’s just plain madness.

I actually know some folks out in Phoenix and they’ve expressed the same thing to me. They were underwater on their mortgages for some years, just like many others, but soon saw an opportunity to list their homes without digging into their own pockets.

Unfortunately, the moment was fleeting, and it now seems like it has passed, either because mortgage rates have shot up, or a combination of that and absurdly priced homes.

When it comes down to it, we’re looking at prices not far off from the recent boom, which only ended about five or six years ago. And with rates not much lower than the 6% or so offered back then, the notion that housing is a bargain is now dead in many parts of the country.

Heck, home prices in both Dallas and Denver hit record levels in May, surpassing their pre-housing crisis peaks reached in June 2007 and August 2006.

In other words, we’ve got a problem, seeing that unemployment is still a concern and wages don’t seem to have increased.

The only thing propping up housing at the moment is a lack of supply, but it has to shift eventually.

Still, RealtyTrac VP Daren Blomquist, who was also cited in the article, doesn’t see the carnage spreading to other cities.

He thinks the rest of the nation will do just fine, regardless of what happens in the desert. Let’s hope he’s right.

(photo: Jay Morgan)