Bubble Watch: Could the Housing Markets in These Top Cities Be Getting Too Hot?

If this isn’t the hottest topic in Real Estate – I don’t know what is.  Enjoy this article from Realtor.com

 

Bubble Watch: Could the Housing Markets in These Top Cities Be Getting Too Hot?

Home prices are skyrocketing faster than inflation. Bidding wars are breaking out. Shacks in the nation’s most scorching real estate markets are selling for over a million bucks. Things seem to be heading up, up, up. Sound familiar?

Déjà vu can be a spooky thing. Some folks these days are beginning to wonder whether the U.S. is seeing another housing bubble, like the one we suffered through beginning in 2007—and a reprise of the bloody financial carnage that followed when it burst.

Well, let’s get this out of the way right now, Chicken Littles of America: The sky isn’t falling, and the real estate market isn’t crashing. There are indeed a few warning clouds on the horizon (more on that below), but things in the world of residential housing are generally safe and steady and continuing to grow. Got that?

Those sky-high prices and ultracompetitive bids we at realtor.com® report on daily are mostly the result of a housing shortage rather than ominous signs of another real estate meltdown. The factors that led to the historic bust—easy-peasy credit for all, rampant flipping, frantic overbuilding—simply aren’t happening today.

In fact, the opposite is true these days.

“Only the most qualified buyers are able to get financing” for mortgages, says our chief economist, Jonathan Smoke.  “Flipping is back to normal. And we’re building about half as many homes as we need.”

As it turns out, not a single big metropolis in the good ol’ USA—that’s right, not even San Francisco or New York—appears to be “bubblicious,” says Smoke, who carried out an analysis of the 50 largest metropolitan markets in the country. During the bubble, home values were dramatically inflated, making the high prices unsustainable.

There are, however, a few super-duper expensive cities (San Jose, we’re looking at you) where the real estate market is showing signs of overheating, according to Smoke’s analysis. That means the high prices can’t be sustained—because as we all learned from high school (grade school?) science class, what heats up must eventually cool down.

In those smoking-hot markets, Smoke expects the relentless rate of price increases to eventually slow, or even dip, when prices hit a point that buyers can no longer afford.

“There are places that have risks,” Smoke says. “But even those places do not resemble what they looked like in their actual bubble years.”

To reach this conclusion, Smoke and the realtor.com data team analyzed 50 major housing markets from 2001 through 2015, using 2001 as a baseline year.

(Critics will be quick to point out that the country was just coming out of the dot-com bust in 2001, and then there were the terrorist attacks of 9/11. But despite those factors, housing experts consider 2001 to be the most normal, recent year before the bust, when homes were considered fairly valued. It is also the earliest year for which all the data were available.)

Smoke and his team then created an index of the six factors that create a housing bubble to assess whether any of these 50 markets were overheating. Here are the criteria:

  • Price appreciation: Are home values shooting up to abnormally high levels, outpacing inflation?
  • Home flipping: Are more homes being bought and sold for a profit within a year?
  • Mortgages:Is there a larger share of buyers getting mortgages, which they potentially could default on? Or are they paying in cash?
  • Home prices compared with wages:Are homes more expensive now for locals earning the local median income than they were in the past?
  • Home prices compared with rent prices:How do the costs of buying today compare with the costs of renting historically?
  • Construction: Are too many homes being built to meet the needs of the area’s population? If so, that could spell trouble.

We’ll say it again: None of the cities below is in a bubble. However, the top six cities—San Jose and San Francisco, CA; Austin, TX; Salt Lake City; Dallas; and Los Angeles—do show signs of overheating as prices continue to zoom up. The next four on the list—Fresno, CA; Buffalo, NY; Charleston, SC; and Portland, OR—show some elevated risk, but they seem to still have plenty of room to grow.

Let’s go to the list!

  1. San Jose, CA

Median list price: $981,500

Bubble index compared with 2001: +19%

Bubble index compared with market peak: -18%

This Silicon Valley hot spot shows the most signs of overheating, no doubt because prices jumped a whopping 10% last year when adjusted for inflation. That’s a year of seriously accelerated growth, even for the San Francisco Bay Area. Buyers are paying a premium to live in San Jose because there simply aren’t enough homes to go around, even with new construction.

But unlike the subprime borrowers who were scooping up homes before 2007, today’s buyers can actually afford the higher prices. About a quarter to a third of local real estate agent Nicki Brown’s sales are all-cash. Or the buyers are plunking down 30% to 50% on properties going for $2 million and up, says Brown, who’s with Alain Pinel Realtors.

  1. San Francisco, CA

Median list price: $855,000

Bubble index compared with 2001: +19%

Bubble index compared with market peak: -26%

Prices in neighboring San Francisco are likewise out of reach for many buyers due to the lack of residences for sale. But like their neighbors to the south in San Jose, plenty of well-paid San Franciscans can afford these properties.

Still, the insane bidding wars of previous years are tapering off as more newly constructed condos are coming online, says Patrick Carlisle, chief market analyst at local brokerage Paragon Real Estate. Luxury homes in the multimillion-dollar range are sitting on the market longer. And the area, which has seen a flood of new residents move in for work over the past few years, has recently been shedding tech jobs.

“After four years of a desperate, overheated, overbidding market … we’re in a transition to a more normal market,” Carlisle says.

  1. Austin, TX

Median list price: $400,000

Bubble index compared with 2001: +17%

Bubble index compared with market peak: -1%

The funky city, a bright blue spot in a deeply red state, may appear riskier than ever at just 1% below its peak. But it’s important to note that the recession didn’t hit Austin nearly as hard as other parts of the country. The city, with its growing tech sector, earned a spot on this list, because the cost of homeownership has since shot up as more people move to the recently crowned top city for millennial buyers.

But rather than crashing, prices will cool, says local real estate agent Josh Bushner of Private Label Realty. “The rate of increases has to slow down, unless everyone gets a 20% raise tomorrow,” he says.

  1. Salt Lake City, UT

Median list price: $347,200

Bubble index compared with 2001: +14%

Bubble index compared with market peak: -20%

The outdoorsy metropolis earned a spot on this list because home prices and rents have been rising faster than in the past, but prices are already starting to cool. Last year, they rose 6%—a full percentage point below the 7% national average. And unlike in many other cities, builders are actually putting up more of those sorely needed new homes.

Many of these residences are rising in new subdivisions about 30 minutes from the city limits, says local real estate agent Brook Bernier of Equity Real Estate. There are also new condo and apartment buildings under construction within Salt Lake City.

“Our economy is booming,” Bernier says, noting that more companies are moving to the area. That, combined with still relatively lower prices, means even “people with student loans can still afford a home.”

  1. Dallas, TX

Median list price: $335,000

Bubble index compared with 2001: +13%

Bubble index compared with market peak: -2%

Being so close to the previous peak of the real estate market, right before it crashed, may give Dallas homeowners and buyers the sweats. But it’s worth noting that, like Austin, the city wasn’t socked quite as hard as other major metros by that housing bust.

Although the local oil industry took a beating, prices in the Texas city still ballooned 9% last year. That’s because more companies are moving and expanding into the area, such as Toyota relocating its North American headquarters from California to nearby Plano, TX. Life beyond oil—it’s a wonderful thing!

“Is it scary that prices are up [9%]? Yes, it is,” says local real estate agent Debbie Murray of Allie Beth Allman & Associates. “But if the demand stays where we are, I don’t see prices coming down anytime soon.”

  1. Los Angeles, CA

Median list price: $690,000

Bubble index compared with 2001: +10%

Bubble index compared with market peak: -35%

The City of Angels shows signs of overheating as prices are up, construction is lagging demand, and there’s more home flipping in the celebrity hot spot than in most other parts of the country,

But the palm tree–lined West Coast mecca has steadily been moving out of the housing bubble danger zone, says Smoke.

“The Los Angeles market looked more overheated two years ago than it does now,” he says. “Price gains and flipping activity have both moderated from more intense levels.”

  1. Fresno, CA

Median list price: $272,100

Bubble index compared with 2001: +9%

Bubble index compared with market peak: -31%

While Fresno doesn’t appear to be overheating, prices are rising at higher rates than they have historically.

But the agricultural area, which is still reasonably priced, doesn’t appear headed for a bust.

“There were a lot of [home] flips three years ago,” says local real estate broker Alejandra Charest of Guarantee Real Estate. “Now it’s a struggle to find one.”

  1. Buffalo, NY

Median list price: $159,900

Bubble index compared with 2001: +7%

Bubble index compared with market peak: -1%

The former industrial powerhouse has fallen on hard times as manufacturing jobs have moved abroad, so it may come as a surprise that Buffalo made this list.

But although locals are still moving out (freeing up homes for buyers), home flipping and the number of new residences under construction are up.

“This could simply be [because] the housing stock needs an upgrade,” Smoke says of the construction. “Its age of housing is substantially older than the rest of the country.”

The city has also been experiencing a resurgence of sorts. Rundown buildings along the waterfront are being transformed into condos and apartments. Nearby shops and restaurants and a green space for outdoor events have sprouted.

“Buffalo has turned a corner,” says local real estate broker Ryan Connolly of Re/Max North.

  1. Charleston, SC

Median list price: $322,300

Bubble index compared with 2001: +7%

Bubble index compared with market peak: -20%

Prices in this coastal city, where horse-drawn carriages still run on the cobblestone streets, have been shooting up faster than they have historically. But the city’s economy is growing and unemployment has been steadily falling, reaching its lowest level in May since early 2008, according to the U.S. Bureau of Labor Statistics.

“We’re not really seeing incomes go up at the same rate as [home] prices,” Smoke says. But Charleston also has more high-paying jobs now than it has in the past. And compared with, say, Silicon Valley, buying a home in Charleston is still a relative bargain.

  1. Portland, OR

Median list price: $428,600

Bubble index compared with 2001: +6%

Bubble index compared with market peak: -26%

Portland may be known for its laid-back vibe, but lately, local buyers have been anything but. The housing shortage has led to fierce bidding wars and soaring prices—11% just in 2015—as more people move into the city while local laws and sluggish construction still limit the number of new residences that can be built.

However, buyers are still able to afford the price tags that are heavy on the zeroes.

“Buyers are concerned because prices have gone up so dramatically,” says local real estate agent Deb Counts-Tabor of Oregon Realty. “But this is basic Econ 101: supply and demand. And until one of those eases, prices will stay higher.”

 

I read this article at: http://www.realtor.com/news/trends/housing-bubble-2/?identityID=9851214&MID=2016_0722_WeeklyNL&RID=353497822&cid=eml-2016-0715-WeeklyNL-blog_1_housingbubble2-blogs_trends

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Sabrina Caton - The Caton Team Realtors

A native Californian with a passion for residential real estate and writing. A full time Realtor with Berkshire Hathaway HomeServices - Drysdale Properties.

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