Is a Home Price Bubble Forming?

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IRVINE, CA—RealtyTrac reports that 21% of US housing markets are less affordable than their historical averages, prompting concerns about a possible housing bubble in the works. A home price bubble is defined as a situation where prices overinflate and eventually decline.

The report analyzed 475 US counties with a combined population of more than 221 million—accounting for more than 70% of the total US population—based on three early warning signs of a possible home price bubble: if the market was less affordable in October than its peak price during the 2005 to 2008 housing bubble; if a market was less affordable in October than its  historical affordability average since January 2000; and if a market had a rising foreclosure rate on loans originated in 2014 compared to loans originated in 2013.

There were 98 counties with a combined population of nearly 62 million where the October affordability percentage was higher than the county's historical average affordability percentage, including Los Angeles County; Harris County, TX; Orange County, CA; Kings County, NY; Dallas County; Bexar County, TX; Alameda County, CA; Middlesex County, MA; Oakland County, MI; and Travis County, TX. There were 30 counties with a combined population of nearly 19 million where the October affordability percentage was above the historical average and where foreclosure rates on 2014 vintage loans were higher than foreclosure rates on 2013 vintage loans, including Kings County, NY; San Francisco, San Mateo and Alameda counties; Suffolk County, MA; Orange County, CA; Honolulu County; Denver County; Washington County, UT; and Deschutes County, OR.

According to Daren Blomquist, VP for RealtyTrac, “Affordability and foreclosure rates by loan vintage are two key metrics that will help consumers, investors, institutions and policy makers identify if a housing market is at risk for another price bubble. While 99% of markets have not returned to the irrational affordability levels during the previous housing bubble, one in five markets have no exceeded their historical affordability norms, which is a strong sign that either a new home price bubble is forming in those markets or that home price appreciation will soon plateau until incomes can catch up.”

Blomquist adds that meanwhile, foreclosure rates on loans originated in 2014 are “still significantly lower than for loans originated during the previous housing bubble in most market, but there was an uptick in foreclosure rates on 2014 vintage loans compared to 2013 vintage loans in more than one-third of the counties we analyzed. This is concerning given that the 2014 loans are newer and have had less time to sour than loans originated in 2013.”

In most markets, it looks as though home price appreciation is plateauing as Blomquist predicts. As GlobeSt.com reported earlier this week, More than half of major US markets are experiencing home price-appreciation deceleration, according to a report from RealtyTrac. However, as GlobeSt.com also reported earlier this week, the median sales price of US single-family homes and condos in October was $193,000, up 2% from the previous month and up 16% from a year ago to the highest level since September 2008, a 73-month high, according to a report from RealtyTrac. In addition, investor share of single-family homes and condos nationally is also rising.

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