MORGAN STANLEY: We Don't See Bubbles Developing In The Hotter Local US Housing Markets

So, people took notice when Shiller said that some local housing markets in the U.S. were looking "bubbly." He's pointed his finger repeatedly and specifically to Phoenix and Las Vegas where prices have roared back.

The credit analysts at Morgan Stanley, however, disagree with these concerns.

"While there are clear geographical variations in the pace of recovery, we do not find 'bubbles' across a wide range of regional housing markets," wrote analysts led by Vishwanath Tirupattur.

They begin their argument by noting that home prices nationally are 19.94% below their peaks.

"While we do not suggest that the pre-crisis peaks were not bubbly, the fact that we are almost 20% below levels attained eight years ago tells us that, at least at the national level, it would be hard to categorize the rise in home prices as a bubble," they wrote.

This is the framework they use to defend today's hotter metropolitan statistical areas (MSA).

"[T]he MSAs that endured the most serious declines in home prices have also rebounded the most. Home prices in MSAs such as Las Vegas, Phoenix and Miami - now regarded as the banner cities for pre-crisis ebullience for housing, recording declines in the 50%+ range - have shown notable rebounds, with price increases in the 30-45% range. Still, they are 35-45% below their pre-crisis peaks. Of the 20 MSAs we look at in Exhibit 1, San Francisco stands out, with a near 50% appreciation in prices since the trough. Still, it is 18.06% below its pre-crisis peak..."

"Besides illustrating the non-symmetric nature of arithmetic averages, this helps to show that, even at a more granular level, the bubble talk seems premature, in our view," they wrote.

Unfortunately, asset price bubbles never look like bubbles until after they burst.