Are we in the midst of another real estate bubble? Who’s to blame? We wade through the lies and give you some answers. 

New York Times Op/Ed columnist, Peter Wallison, has declared the real estate bubble is back.

While he ultimately reaches the right conclusion, nearly all of his assertions are either patently false or misleading. In fact, New York Times Op/Ed columnist, Jo Nocera has termed Wallison’s take on the housing bubble “the Big Lie”.

It’s imperative to understand the housing bubble and financial crisis of 2008 to ensure we do not repeat the same folly that brought our economy to its knees. Home prices of late have been artificially inflated by certain market factors (read: overbidding from real estate speculators). However, the current situation bears zero resemblance to the previous bubble, despite Mr. Wallison’s most earnest exhortations.

Follow along as we critique his premises one-by-one.

Premise one: “Housing bubbles [. . .] become visible — and can legitimately be called bubbles — when housing prices diverge significantly from rents.”

All good lies start with a grain of truth.

Rents historically appreciate at the rate of consumer inflation since wages follow consumer inflation and rents are equilibrated by the population’s ability to pay.

Real estate’s mean price also proceeds at the rate of inflation, with peaks and troughs depending on the market’s “cycles.” Thus, according to Mr. Wallison, rents act as a standard against which real estate prices ought to be measured.

While this logic basically works for determining long-term price stability, it is not a useful indicator of a housing bubble on its own. When home price inflation greatly outpaces rent inflation it is a basic truism that would-be buyers opt to rent instead, which in turn places downward pressure on prices since homebuyer demand falls.

Thus, in order to properly link price/rent divergence to a housing bubble, one needs to claim that a bubble is apparent when home prices vastly outpace rents and buyer demand continues to rise. This clearly occurred during the last bubble.

In 2006 the California homeownership rate peaked at 60.7%. Despite the fact that California was experiencing near 100% price appreciation, we were adding more bona fide, end-user homeowners during the bubble years. This occurred, as is now well known, due to the wide availability of NINJA loans (no income, no job or assets).

Today, prices are appreciating at unsustainable rates while the homeownership rate continues to fall — it registered an anemic 54.4% as of November 2013. So, while price appreciation is outpacing rents, the market is behaving normally as more individuals are renting rather than buying at unsustainable prices.

Premise two: “Both this bubble and the last one were caused by the government’s housing policies, which made it possible for many people to purchase homes with very little or no money down.”

Wallison is well known as the progenitor of this myth. Study after study have all propounded that low income and equal opportunity housing policies were not to blame for the mortgage meltdown and financial crisis of 2008. Here is the landmark Federal Reserve study on the topic.

But one doesn’t need a double blind, Fed-commissioned study to understand this. The policies being slighted by folks like Wallison started in the Carter-era. That’s right, we’re talking 1970s. Fannie Mae and Freddie Mac’s mandate to purchase low-income loans was laid out in 1992, after which followed a period of weak home price appreciation. That’s a fair rebuttal to the specious argument that these policies caused the bubble.

No, the government’s low-income and equal housing programs had nothing to do with the housing bubble, current or past. The bubble was engineered in one place and one place only: Wall Street. Wall Street developed the liar loans, packaged them up and sold them to suckers, plain and simple. Fannie Mae and Freddie Mac did get caught-up in buying these loans, but only after they began losing market share to private investors.

Premise three: “Today, the same forces are operating.”

This just ain’t true.

Fannie Mae and Freddie Mac, while still integral to the housing market, are well under control and shrinking. The FHA’s footprint is also getting smaller. Mortgage originations in general are down across the board. Interest rates are rising. The Dodd-Frank Wall Street Reform and Consumer Protection Act has its troubles, but it has effectively outlawed the NINJA loans of the millennium boom.

The 2000s real estate bubble was driven by sub-prime loans created and pushed by Wall Street bankers. Very different forces are operating in today’s mini-bubble. As is now widely accepted, speculators artificially drove up asset prices throughout 2012 and 2013. This means prices were inflated with cash, not financing, which eliminates the possibility of the widespread default that popped the last bubble.

The reality of new mortgage rules and old-fashioned risk aversion on behalf of lenders has kept the current bubble from taking off. Investors have priced end users out of the market, which means the general consumer is protected from the bone-crushing losses they suffered in 2008.

Since this is not a debt bubble it will not implode. Instead it will slowly fizzle as investors either collect rents or sell at a loss. Either way, prices will slowly return to equilibrium.

So yes, the bubble is back, but it’s a far cry from the nuclear event of a few years ago.