Are Some Cities Close to a Housing Bubble?

Posted on November 07, 2017 by Laura Lam

Urban Institute housing bubble 2According to a recent report released by the Urban Institute, with home prices on the rise, some cities are inching closer to a housing bubble.  The Urban Institute explained that in order to determine if the U.S. is in a housing bubble, knowing the reason for the price growth is critical.

In order to determine the reason for the price growth, Urban Institute utilized its housing affordability index.  Overall, housing in the U.S. remains very much in the affordable range. The median household can afford a house that is $70,000 more expensive than the median home price today. In 2006, the median household could only afford a mortgage that was $22,000 more expensive than the median home price.  First American Financial Corp.’s latest Real House Price Index found that real home prices are now 38.4% below their housing boom peak in July 2006.

First American Chief Economist Mark Fleming explains that as mortgage rates rise, affordability will continue to decline for those seeking to achieve the goal of homeownership.  “While affordability is lower than a year ago, it remains high by historic standards,” he said.  “Only three states and the District of Columbia are less affordable today than they were in January 2000.”

Urban Institutehousing bubbleThe areas that could possible cause concern include Hawaii, which is up 8.1% from January 2000, California which increased 5.7%, and Alaska, where home prices are up 4.6%. The District of Columbia is up 3.6% from that same time period.

The Urban Institute saw similar results when it measured the top 37 largest metropolitan statistical areas to find which, if any, could be areas of concern for a real estate bubble using data from CoreLogic, the U.S. Census Bureau, the U.S. Bureau of Labor Statistics and Freddie Mac. Urban Institute’s researchers looked at the area’s real increase in home prices since their lowest point and the institute’s affordability measure.

The company added the rankings together and re-ranked the MSAs most likely to be in a bubble, calling it the “bubble watch” rank. The top 10 MSAs are ranked high on both home price growth and lack of affordability measures. But further down the list, the rank could be driven by one measure or the other.

Six metros stood out above the rest: the San Francisco area and the San Jose area tied for the top ranking in the institute’s bubble watch. The Miami area and Oakland, California areas tied for third place, and the Portland and Seattle areas tied for fifth place.

Source:  Urban Institute/Housing Wire