Earlier this year, after solid price increases nationally (11 percent in
2013 alone) and near meteoric gains in some markets, speculation began about another
housing “bubble.” Memories of the chaos that
followed the last bubble were still very fresh – ongoing in fact – so the
prospect of a repeat was a little scary.
In May 2014 CoreLogic announced a new measure it had added to its Home Price
Index (HPI) data and HPI Forecasts. The
Market Condition Indicator is intended to assess whether individual markets are
undervalued, priced at their actual value, or overvalued by looking at home
prices in light of the long-run sustainable levels that can be supported by
local market fundamentals such as disposable income. An undervalued or overvalued market was
defined as one having a current HPI 10 percent above or below the long-term
fundamental value. . CoreLogic looked at long-term fundamental values
for 300 Core Based Statistical Areas (CBSAs) based on real disposable income
per capital and then calculated the gap between actual or forecasted home
prices and their long-run sustainable levels.
Home prices have continued their significant recovery into 2014. Even though the double digit annual price
increases have moderated after a more than 20 month streak, CoreLogic’s year-over-year
HPI including distressed sales was still up 6.5 percent in August. Because this trend has bolstered talk of a
housing bubble CoreLogic’s principal economist Mark Liu decided it was time to
take another look at home prices beyond simple price appreciation.
In a recent article in the company’s Insights
blog Liu talked a little more about the Market Condition Indicators and whether
or not a bubble is still a concern. Most
homeowners use their income to pay their mortgage, Liu says, so there is an
established relationship between income levels and home prices. “In the long run home price growth cannot be
sustained above income growth because housing would become unaffordable, demand
would decline and home price growth would either slow or decline to realign
with income levels.”
The figure above shows national home
prices and the population weighted averages between home prices and their
long-run sustainable levels in the 50 largest markets. The figure clearly shows the run up in the
bubble as prices between January 2005 and November 2007 rose more than 10
percent above sustainable levels; closer to 20 percent at the absolute
peak. Then prices collapsed, falling
quickly to levels of less than 10 percent below sustainable levels, nearing -15
percent in mid-2012.
Since then, as house prices
continued to rise, the gap narrowed to 6 percent below the long-run sustainable
level by August 2014, and is forecast to shrink further to just 3 percent by
the end of 2016. Any bubble on the
national front is clearly a ways away.
However there are CBSAs that are already
in bubble territory. Table 1 shows the
four overvalued markets of the top 50 CBSAs. In Austin and Houston the energy
boom has fuel job and population growth and pushed home prices well above
sustainable levels, in fact well above the peaks they established before the recession. Austin is 22.8 percent above its peak and
Houston 16.2 percent. The other two most
overvalued metros are Miami, Fla. and Washington, D.C. As home prices have
risen significantly since 2013, homes have become less affordable in these two
markets, and therefore, prices are less sustainable. Both however remain below their previous
At the other end of the spectrum,
Pittsburgh is the most undervalued metro.
The city escaped the worse of the housing downturn and now, although its
home price level is about 14.7 percent more than the peak level prior to the
recovery, the disposal income per capita in Pittsburgh has risen even faster at
21.1 percent. These leaves Pittsburgh
with a 25 percent gap relative to the sustainable home price level. In the other three cities featured in Table 2 home
prices remain significantly below their historical peak levels, in spite of
strong recovery in housing markets and rapid increases in disposal income.
The bottom line, Liu says, is that
the CoreLogic Market Condition Indicators show there is no bubble yet. Despite the significant growth in home prices
since they hit bottom a little more than two years ago most markets are still
well within their sustainable levels and most are still only recovering from
the market collapse.