SAN DIEGO—Despite speculation to the contrary, Norm Miller, PhD, Ernest W. Hahn Chair of Real Estate Finance in the School of Business Administration's Burnham-Moores Center for Real Estate at the University of San Diego, says we are far from bubble territory on a national or metropolitan level. While US home prices are increasing on a national level more than expected, suggesting a definitive recovery from the recession and causing some experts to speculate mistakenly that another bubble is in our midst, Miller refutes this.

New research conducted by Miller; Michael Sklarz, president of Collateral Analytics; and Jim Follain, SVP for research and development at Collateral Analytics, indicates that while there are some isolated price bubbles around the nation, we are nowhere near a bubble nationally or regionally. “In essence, a bubble is an unsustainable price trend fueled by speculation that prices will continue to increase,” says Miller. “A bubble occurs when prices keep rising only because they are expected to keep rising, rather than being based on the fundamentals of income, wealth and debt costs.”

Miller adds that while we're not seeing that trend nationwide, there are some cities and/or zip codes that are exhibiting frothy behavior. Specifically, zip codes in and around seven areas—Miami; Denver; Portland, OR; San Diego; Oakland/Berkeley; San Francisco; and San Rafael—may be near bubble levels that could pop. In particular, those metropolitan areas driven by tech-stock-capital appetites are more volatile and possibly more vulnerable. “When the next recession hits, prices could decline in the 'San' markets. Less a real estate bubble, this is more of a 'tech bubble' that will affect some real estate markets when the stock prices dip significantly.”

Miller tells GlobeSt.com that the industry “observed some contagion within the same submarkets during 2007-2009 when distressed sales exceeded 10% of sales, but we did not observe any domino effects from metro market to metro market or even from one distinct neighborhood to another. To the extent a housing bubble is triggered by a tech-stock bubble bursting, we could see several neighborhoods hit, and the tech stock bursting could hit NASDAQ more broadly, but the common factor will be that some housing markets have been supported by tech-stock wealth.”

He also tells GlobeSt.com that Silicon Valley and similar markets would be hit the most. “Even commercial rents could be hit, as we've seen in San Francisco before. But a domino effect within the housing sector is very unlikely. Aside from interest-rate changes, most housing markets are very localized and very much dependent on localized economic trends.”

When home prices collapse, they don't do it evenly across a metro level, so it's important not to focus too much on averages, says Miller. For this reason, he and his co-authors focused on neighborhoods, which have the ideal level of analysis. “Those neighborhoods with the least equity or highest loan-to-value ratios tend to also be the most volatile.” Miller sees median household income, value of the US dollar against foreign currency, demand for housing in coastal regions with limited supply and a dependence on low interest rates as significant contributors to localized price bubbles in the seven markets.

Miller and his co-authors identified and monitored approximately 400,000 neighborhoods around the US, along with approximately 20,000 surrounding zip codes. The analysis is detailed in their white paper, titled “Is a New Home Price Bubble Forming?” and prepared using the Collateral Analytics Home Price Forecast Model. The paper references this model as using a “number of fundamental and technical drivers (independent variables), which provide a more economically based way to analyze home price intrinsic value and, thus, overvaluation (or undervaluation).”

As reported in March, a long approval process and serious opposition from various groups have been stymying new development in San Diego, according to Miller, who chatted with us exclusively about his new position, capital-markets concerns in San Diego and other aspects of CRE finance in this market.