The U.S. housing market has improved dramatically since the depths of the recession. Home prices in particular have grown dramatically in recent years, nearing a full nominal recovery nationwide. In high-profile growth markets like San Francisco; San Jose, Calif.; and Austin, Texas we are seeing record-high median prices.
With this significant amount of price appreciation, there’s chatter about whether certain hot markets have entered into bubble territory again. Realtor.com® sought to answer that question for 50 of the largest markets in the U.S. by conducting an in-depth market analysis of six housing trends that were fundamental to the bubble years.
The analysis evaluates a housing market’s bubble potential based on six factors fundamental to the boom and bust cycle of the mid-2000s including: real price appreciation, house flipping share of overall sales, mortgage transaction share of overall sales, price to homeowner income, price to rent, and new households per new construction starts. See Table 1 for a detailed overview of each factor.
The index measures each factor by market and compares it to its respective 2001 levels – a year where housing was considered to be in healthy growth mode and fairly valued. The 2001 baseline score for the index is 100, if a market receives a score of more than 100 it has more bubble potential than it did in 2001; if it is lower than 100, it’s has less. Fifty of the largest markets in the country were included in the analysis.
The analysis shows that economic growth and household formation, paired with limited inventory are causing homes in many areas to cost more, relative to rents and incomes, than in more balanced times. However, there is no evidence of the systemic risk of the mid-2000s housing bubble. In fact, what is happening now is the opposite of what occurred during the housing boom of 2004-2006 – credit remains tight; flipping is not rampant; and new construction is severely constrained. It was these factors that led to the price collapse. That being said, the rapid price increases currently taking place in places such as San Jose, San Francisco, and Austin are unsustainable in the long term and we expect to see these price gains naturally taper off – whether it’s from people choosing to rent over buy, move in with family or roommates or relocate to a housing market that is more affordable.
Nationally, the housing market has three percent less risk than it did in 2001 – the index’s baseline year for market health – and 25 percent less risk than it did during the peak in 2005. Although there is elevated real price growth – estimated at seven percent in 2015 – the other fundamentals – such as flipping, new construction and mortgage share – are far below their levels during the housing boom.
On a market level, realtor.com’s analysis revealed that six major markets – San Jose, San Francisco, Austin, Salt Lake City, Dallas and Los Angeles are seeing rapid price appreciation driven by strong economies and lack of inventory. These markets registering an index score of 110 or higher.
Nationally, the home price-to-rent ratio is 12 percent above its 2001 level, but remains 18 percent beneath where it was in 2005. Price-to-income ratio is also higher than 2001 by 28 percent, but is 12 percent beneath its level in 2005. Flipping represents four percent of sales in today’s market, in-line with 2001, but lower than 2005 when flipping accounted for six percent of sales. New construction is slowly recovering from the recession. It’s currently at a ratio of two new households for each start, which is twice the balanced (and normal) demand of 2001. In 2005, the ratio was .65 new households per start. Tight lending conditions are keeping the mortgage transaction share low at 68 percent of all sales, which is 15 percent beneath 2001 and 12 percent lower than 2005.
Realtor.com examined the 10 markets with the highest index score. Analysis revealed that the first six markets on the list – San Jose, San Francisco, Austin, Salt Lake City, Dallas, and Los Angeles – are showing some signs of unstainable price gains that are expected to naturally taper off.
Markets ranked seven through 10 – Fresno, Calif.; Buffalo, N.Y.; Charleston, S.C.; and Portland, Ore. – are registering scores of 105 to 109. While these markets are showing recent significant price appreciation, they are not overheating. With the exception of Buffalo, all of these markets experienced a housing bubble in the early 2000s and their index values in 2005 reflected that, yet today they are substantially lower. Most of them follow the same pattern we see with the other markets on the list, that the fundamental problem is the lack of new construction keeping up with economic and demographic growth.
10 Markets with the Highest Index Scores
1. San Jose – Silicon Valley prices have been dramatically increasing over the last few years causing chatter about whether the market is in a bubble. While the index does indicate that the market has 19 percent more potential than it did in 2001, the market’s index score is currently 18 percent below its peak level in 2006. The clear undersupply of new construction against growth in households is likely the primary culprit in driving up prices. Without oversupply or mortgage delinquency risk, the higher prices are a reflection of the otherwise healthy market conditions producing the high paying jobs that can afford to pay the higher prices.
Analysis: The market saw 10 percent real gains in home prices in 2015. Price to income is 6.4, only six percent less than its peak level in 2006. Price to rent ratio is currently 35 percent more than its state in 2001, but still 30 percent less than its peak. Flipping is up 38 percent more than its level in 2001, but is down 38 percent compared to 2005. Limiting the overall risk are constrained new construction and low mortgage financing. Two new households are formed per housing start, which is similar to the U.S. overall and half of what a normal market should deliver. Mortgage transactions account for 76 percent of the sales, which is 19 percent less than its peak of 94 percent in 2005.
2. San Francisco – This Bay Area neighbor is very similar to San Jose in several ways. The analysis indicates that the San Francisco metropolitan statistical area is currently 19 percent higher than it was 2001, but 26 percent below its peak level. Like San Jose, San Francisco is not seeing enough new construction to keep pace with household growth, so again the analysis concludes that the increase in prices is a reflection of the market’s growth and not credit-fueled speculation. The market is a victim of its own economic success producing gains in high-paying jobs that when coupled with limited ability to increase the housing stock result in higher home prices.
Analysis: San Francisco saw nine percent gains in real prices in 2015. Price relative to income is 36 percent more than it was in 2001 and 10 percent less than its peak in 2005. Price relative to rent is 20 percent more than 2001, but 30 percent less than its peak. Lack of new construction and limited mortgage activity are mitigating the price appreciation in this market. More than two new households are being formed per new housing start, which is similar to the U.S. overall and half of what a normal market should deliver. Mortgage transactions account for 77 percent of the sales, which is 18 percent less than its peak of 94 percent in 2005.
3. Austin – Austin didn’t experience as severe a recession as the rest of the country in 2007-2012, when home prices dropped 16 percent locally compared to declines of more than 40 percent nationally. The index shows the market is 17 percent higher than its state in 2001 and one percent lower than peak. However, there is little evidence to support that the market had a true bubble during the national housing boom period, so the reference to its peak is less problematic. Similar to other high profile economic growth markets, the increase in price is a natural outcome of substantial growth in households without the corresponding growth in housing stock to keep the housing market in balance.
Analysis: The primary factors at work in Austin are prices relative to rent and income. Price to income stands at 3.1, a 35 percent increase from 2001. Price to rent is 17, which is 30 percent more than 2001 and almost at same level as the peak. The remaining key factors mitigate the risk resulting from higher prices. The market only sees 1.74 new housing starts for every new household, so there is no evidence of over building. Likewise, flipping activity is very limited at two percent of transactions. The mortgage share is 73 percent, below the 77 percent in 2001, and showing no sign of loose credit.
4. Salt Lake City – This market’s current index score is 14 higher than it was in 2001, but 20 percent below its peak. Although real prices have appreciated an average of seven percent over the last four years, the market is not in the bubble territory it was in in 2005-2006 according to the index. In addition, price increases are already moderating and the market is not likely to see bubble factors increase in the next few years.
Analysis: Salt Lake City saw a real price gain of six percent in home prices in 2015. Price relative to rents is 14 percent higher than 2001, but 22 percent less than the peak. Price relative to income is 20 percent higher than 2001, but 14 percent less than peak. All other factors show no sign of risk. The supply of new construction has recovered in Salt Lake City better than other markets as it has increased steadily since the recovery began and is currently at 1.15 households per start, which is on par with 2001.
5. Dallas – Analysis shows the Dallas market has an index score that’s 13 percent higher than it was in 2001 and one percent less than its peak in 2004. Like fellow Texas market Austin, Dallas did not experience much of a boom and as a result, only experienced a mild recession and price correction compared to the rest of the U.S. The price gains in Dallas in recent years can be attributed to the lack of growth in the housing stock relative to the large gains in employment and corresponding households.
Analysis: The market saw nine percent real gains in home prices in 2015, far higher than the six percent real price gains that represented the peak it experienced in 2004, which was moderate compared to other market booms. The key factors at work today are price to rent and price to income, which are at all-time highs. Price to rent is 15, which is 30 percent higher than 2001; and price to income is 27 percent more than 2001. The market’s risk is being mitigated by limited flipping of three percent, low mortgage share of 68 percent, and low levels of new construction. The market is seeing 1.6 new households for every new housing start.
6. Los Angeles – The Los Angeles MSA has an index score that’s 10 percent higher now than it was in 2001, but 35 percent lower than its peak in 2005. Similar to other markets analyzed, Los Angeles is now suffering from household growth far outpacing new construction. More than three households are being formed for every new single-family start. The reverse scenario was true leading up to the peak of the bubble.
The market’s economic success since the recession coupled with limited ability to grow the housing stock has resulted in its current situation, but it is nowhere near the level of risk back in 2005. Additionally, Los Angeles is actually seeing its risk decrease. Price appreciation is moderating and will likely see further declines in the index score this year.
Analysis: The market saw a seven percent real gain in home prices in 2015. The key factors driving its index score are the price to income ratio and the level of flipping. Price to income ratio is close to six now, 66 percent more than it was in 2001, but 15 percent less than its peak in 2007. Flipping activity, while reduced from the last three years, is still beyond five percent of sales, which ranks Los Angeles among the markets seeing the most flipping. The factors minimizing risk include the aforementioned lack of overbuilding and a low mortgage share of 76 percent.
7. Fresno, Calif. – This agriculture town has a nine percent higher index score than it had in 2001, but is still 31 percent from its peak. While certain risk factors are elevated—an indication that this level of price appreciation is not sustainable over the long term—they are nowhere close to what they were when the market was really in a bubble in 2004-2005.
Analysis: The market saw a six percent real gain in home prices in 2015. Key factors of concern are the price to income ratio and the level of flipping activity. Price to income is 47 percent more than its level in 2001, but 29 percent below its peak in 2005. Flipping is now six percent of sales, twice the level of 2001, but 25 percent less than the peak in 2005. Meanwhile, there is no evidence of overbuilding as there are 1.3 new households for every new start and the mortgage share remains low at 75 percent. In addition, price relative to rents are actually lower now than in 2001.
8. Buffalo, N.Y. – Buffalo effectively dodged the housing crisis in 2007-2012. Its index score is seven percent higher than it was in 2001, and slightly above the moderate peak it experienced in the mid 2000’s. In this analysis, Buffalo emerges as a fairly unique market as it is the only market experiencing new construction activity without significant household growth.
Analysis: The market saw a seven percent real gain in prices in 2015. However, prices have steadily grown for the past few years. Key fundamentals active in this market are heightened flipping activity and substantial growth in new single-family construction. The flipping share of sales has ranged between three and four percent in recent years, which is twice the share the share in 2001. The market is losing households, but still has new construction activity. So unlike the other markets on our list, the new construction risk factor emerges as the key factor in this market. Other factors mitigating that include prices relatively stable compared to rents and income, as well as relatively moderate price appreciation that has averaged five percent over the last four years.
9. Charleston, S.C. – Charleston’s index is seven percent higher than it was in 2001, but 20 percent beneath its market peak. Charleston appears to be a very healthy market, only one risk factor is elevated and that is the price to income ratio, which is being driven by substantial economic growth causing both home prices and rents to grow as households grow.
Analysis: The price to income ratio in Charleston is 33 percent higher than it was in 2001, and 10 percent lower than its peak level. Real price appreciation was 10 percent in 2015, yet prices remain in alignment with rent. Mortgage share and new construction are in a balanced state, and flipping activities are 60 percent lower than its peak in 2005 and 2006.
10. Portland, Ore. – The northwestern city of Portland has an index that’s six percent higher than in 2001, yet it is 26 percent lower than it was during its peak. The primary risk factor that is elevated is price to income, which stands 35 percent more than it was in 2001, and eight percent below its peak. Otherwise, Portland is a very healthy market.
Analysis: Real price appreciation was 11 percent in 2015, yet prices remain in alignment with rent. Mortgage transaction share is 78 percent, 10 percent lower than the pre-crisis level. New construction is in tight supply; there are 2.6 new households per new housing start. Like other large growth markets, the above average price appreciation is being driven by economic growth and is being exacerbated by very limited growth in new construction.
Source - Realtor.com