Home prices are growing far faster than rental costs, providing a clear indication that the housing market is entering another bubble, according to Peter J. Wallison, a senior fellow at the American Enterprise Institute and former member of the Financial Crisis Inquiry Commission.

In a stable market, rental and home prices should increase at about the same pace and track the inflation rate, Wallison wrote in an op-ed that appeared in The New York Times. Historically, that means they both should rise about 3 percent a year, he said.

But between 2011 and the third quarter of 2013, home prices increased by 5.83 percent while rental costs increased only 2 percent, he said. Wallison suggests that contrary to the view held broadly among many housing observers that credit is too tight, large mortgages are too easy for borrowers to obtain.

Though more government-controlled organizations offered access to loans with lower down payments during the housing boom than they do today, Wallison said minimum down payment requirements are still too generous and are fueling a bubble. Wallison’s view contradicts those of many economists who argue that lending is actually overly restrictive and has been a headwind to the housing recovery.

His claims that growth in housing prices in recent years far overshadowed growth in rental rates would seem to paint a particularly bleak picture for housing affordability. The Harvard Joint Center for Housing Studies recently sounded the alarm of what it cast as an affordability crisis for renters — the group that Wallison said has seen housing costs rise at a far slower pace than homebuyers.

Source: The New York Times

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