Urban Institute: No US housing bubble despite higher home prices

by Francis Monfort01 Nov 2017
The US housing is not in a bubble in spite of increasing house prices and is nowhere near the situation seen prior to the 2008 crisis, according to Urban Institute researchers Bing Bai and Edward Golding.

The researchers looked into the question of whether recent house price appreciation is driven by fundamentals or by pure speculation. To answer the question, they used the Housing Finance Policy Center’s housing affordability index.

“Today, the median household can afford a house that is $70,000 more expensive than the price of the median house sold,” the researchers said. “In 2006, there was a $22,000 shortfall between what the median household could afford and the median sales price. Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion.”

The researchers also looked into whether there are any regional housing bubbles and found that some areas show cause for concern. Looking at real increases in house prices and the affordability measure, the researchers ranked the 37 largest metropolitan statistical areas (MSA) according to the likelihood of a bubble.

The “bubble watch” ranking found the San Francisco-Redwood City-South San Francisco, Calif., MSA and the San Jose-Sunnyvale-Santa Clara MSA tied at the highest ranking. The Miami-Miami Beach-Kendall, Fla., MSA and the Oakland-Hayward-Berkeley, Calif., MSA were tied at third place.

The researchers enumerated the factors that should be considered in modeling the risk of housing bubbles for MSAs. These include constrained supply due to a lack of construction, the influx of international investors, the entry of nontraditional investors buying homes to rent, and the fact that certain MSAs are rebounding from “overshooting” in the downturn.

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