Scotsman Guide - Victor Whitman - 12 October 2016
The height of the last housing bubble was reached in 2006. Now, some 10 years later, some economists say home prices are rising too fast again and are approaching bubble territory.
Numerous cities have seen new peaks in home prices, recent data suggests. This past summer, for example, the price of an average home in San Jose, California, topped $1 million, the first time ever that the median home price in a city had ever reached that threshold. On the opposite coast, the housing market in Brooklyn, New York, has been on fire.
Denver, Seattle, Portland, Oregon, and several cities in Texas and Florida have seen the average home prices surpass the peak of the last housing boom.
With these gains, studies suggest housing bubbles could be forming in some markets — a situation where the home prices rise beyond levels considered sustainable. Analysts are still reluctant, however, to use the word "bubble" to describe any particular market.
“There are some markets to take a closer look at, pay attention to,” said Frank Nothaft, chief economist at CoreLogic. “I don’t believe there is one single metric that would say, ‘Oh, flashing light, this is a bubble.’”
In a recent analysis, CoreLogic deemed 31 of the nation’s top 100 core-based statistical areas — a geographical area anchored by a city — as overvalued. By contrast, there were 21 overvalued markets in January 2002, 45 for January 2004 and 70 for January 2006, CoreLogic said.
This suggests that the housing market is still in an early phase of a boom cycle, roughly equivalent to the year 2003, when compared to the 2002-2006 boom cycle.
Nothaft said home prices have been driven up by low interest rates and rising incomes, as well as tight inventories of homes for sale. Of these, a prolonged period of near historically low mortgage rates have been the most surprising factor. The low rates have made homes more affordable, and driven sales, thus reducing inventories and pushing up prices.
Nothaft expects prices in overvalued markets to rise at a slower pace, but not decline, in the coming year. Nationally, home prices have climbed by about 6 percent annually.
“It is hard to generalize about different markets because it is important to look at what is really driving the local economy,” Nothaft told Scotsman Guide News. “If you have a local economy that is overvalued, that has had rapid house price growth, and you don’t have the employment growth [and] the income growth, then there is something out of kilter. Those are the markets that we will see some moderation.”
Ed Pinto, who co-directs the American Enterprise Institute’s International Center on Housing Risk, said government loan data provides ample evidence that several volatile housing markets in California and Florida are now in a boom cycle. Pinto wouldn’t describe these markets as being in a bubble per se, however..
“I am seeing booms,” Pinto said during a telephone interview. “When a boom turns into a bubble, it is difficult to ascertain.”
Pinto said higher-priced markets with strong economies, like San Francisco, were less at risk of a painful correction. He said lower-priced markets, however, like the Riverside-San Bernardino area outside Los Angeles, could be at greater risk. He said rising mortgage rates and gas prices would tend to cause more pain in those communities. Pinto also cited AEI data suggesting that roughly 50 percent of home purchases in Riverside-San Bernardino have been financed with Federal Housing Administration (FHA) loans, an indicator that a greater percentage of home purchase were from subprime borrowers.
Pinto said boom cycles always end in the same way.
“The longer it continues, the more difficult the correction ends up being.,” he said. “And real estate markets always correct.”
Other analysts, however, see no problem with the rising prices.
First American Corp. Chief Economist Mark Fleming said the real adjusted price of homes hasn’t risen much in cities considered high priced.
In Portland and Seattle, for example, home prices have risen by double digits over the past year. When wage gains and cost offsets from the low interest rates are considered, however, the real home prices in those cities have jumped by less than 1 percent over the past year, Fleming said.
On a national basis, First American said home prices have declined on a real basis. Fleming said he's seen no evidence that home prices are being driven up by irrational expectations of future price growth, an indicator of a bubble. The gains have been underpinned by strengthening economies and the low rates.
“Right now, house prices are about 40 percent less expensive nationally than they were at the height of the housing boom in 2006, and they are even 20 percent less expensive than they were in 2000,” Fleming told Scotsman Guide News. “Nationally, house prices are about as affordable as they have been in a quarter century.”