The Health of the Housing Market as of the First Quarter of 2018

Twelve Markets Signal High Risk, While New Markets Have Emerged

By Bin He Housing Affordability, Real Estate

Home prices continued to rise in many markets in the first quarter of 2018, reflecting rising buyer demand and a low for-sale inventory. Most markets are still healthy or have relatively low risk, according to the CoreLogic Market Health Indicator. Twelve of the 100 largest metro markets (based on population) have been identified as high-risk markets. Furthermore, new high-risk markets outside of Florida and California have emerged.

The CoreLogic Market Health Indicator evaluates whether individual markets have high, normal or low risk by analyzing several economic factors. First, using the CoreLogic Home Price Index (HPI), it compares home prices against the long-run sustainable levels that can be supported by local market fundamentals, such as disposable income. Since most homeowners budget a portion of their income for shelter costs, and these costs are generally related to home prices, there is an established long-term relationship between income levels and home prices. Second, the CoreLogic Market Health Indicator looks at the appreciation of home prices relative to rents. Over the long run, market forces should equalize the cost and benefits of home ownership and renting. If home prices deviate too far from rents, then it is due for a correction sooner or later. In addition to these fundamental drivers that justify the level of home prices, the analysis also accounts for speculative activity measured by the CoreLogic Flipping Index and CoreLogic Fraud Index. If the Flipping Index is too high, then investors are speculating on short-term home price gains, and vacancy rates may be elevated. Lastly, housing bubbles are often accompanied by widespread mortgage fraud.

High Risk Metros

Figure 1 shows the 12 high-risk markets of the top 100 metro areas analyzed as of the first quarter of 2018.1  Compared to one year ago, the number of high-risk markets among the 100 largest metro areas has increased from nine to 12.2  Home prices have appreciated at a rate more than twice as large as the growth of rent in these metro areas since January 2012.3 Figure 1 also shows the national ranking for flipping and fraud risk in these metro areas. Most of these areas have flipping and fraud ranked in the top quantile, indicating short-term speculation, as well as a high risk of mortgage fraud – which may lead to more bubbles developing in these areas. Contrary to last year, when all high-risk markets were in either Florida or California, metro areas in Nevada, Texas, Louisiana, New York and Maryland have now emerged as high-risk markets. 

Low Risk Metros

Figure 2 shows the three low-risk markets identified in the first quarter of 2018. In these markets, the price-to-income and price-to-rent ratios are in line with historical levels, and the flipping- and fraud-risk indicators are low. Even though home prices in the Boston and Cambridge metro areas, have appreciated more than 40 percent since January 2012, rents have had sizeable increases too, indicating that price and rent growth are backed by market fundamentals, such as disposable income. Meanwhile, all three of the lowest-risk metros have national flipping and fraud risk ranked in the bottom quantile, suggesting low risk of a bubble developing. One striking fact is that the number of low-risk markets has declined from 14 to 3 since January 2017, indicating more markets are at risk of at least one of the followings: price to income, price to rent, flipping, and fraud.

1. September 2017 CoreLogic Single-family Combined HPI, Rental Trends, Single-Family Combined no bedroom breakdowns median rent per square feet, Q3 2017 CoreLogic Flipping Index and CoreLogic Fraud Index were used in the analysis.

2. Highest and Lowest Risk U.S. Housing Markets as of Q1 2017

3. Cap rates are inversely related to price-to-rent ratio. Hence, the metros in Figure 1 have higher price-to-rent than can be explained by a decline in the cap rate from 2012 to current.

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