Market Health Indicator Flags Nine Markets As High Risk, Six in Florida Alone
Home prices have continued to rise, though for many markets, at a slower pace. Most markets are still healthy or have relatively low risk, according to the CoreLogic Market Health Indicator. However, nine of the top 100 metro markets – six in Florida alone – have been identified as high-risk markets.
The CoreLogic Market Health Indicator evaluates whether individual markets have high, normal or low risk by analyzing several economic factors. First, it compares home prices, using the CoreLogic Home Price Index (HPI) against the long-run sustainable levels that can be supported by local market fundamentals, such as disposable income. Because most homeowners use their income to pay for home mortgages, there is an established long-term relationship between income levels and home prices. Second, it looks at the appreciation of home prices relative to rents. Renting is an obvious alternative to home ownership, and 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. Besides the fundamental drivers that justify the level of home prices mentioned above, the analysis also accounts for speculative belief measured by the CoreLogic Flipping Index and CoreLogic Fraud Index. If the flipping index is too high, then people are speculating on short-term home price gains. On the other hand, housing bubbles are always accompanied by widespread mortgage fraud 1.
Table 1 shows the nine high-risk markets of the top 100 metro areas analyzed, six of which are from Florida and the rest are from California 2. Home prices have appreciated more than 50 percent since January 2012 in these metro areas with the exception of Tampa. Meanwhile, rent appreciated less than half of the home price growth. Regardless of whether it is price-to-income measures or price-to-rent measures, all nine markets are overvalued. Table 1 also shows the national ranking for flipping and fraud risk in these metro areas. As we can see, most of them have flipping and fraud ranked in the top quantile, indicating short-term speculation as well as high mortgage fraud, which might lead to another bubble in those areas.
Table 2 shows the 14 low-risk markets identified, in which the price-to-income and price-to-rent are reasonable and the flipping and fraud activities are low. Although in some of the metro areas home prices have appreciated more than 30 percent since Jan 2012, i.e. Boston and Charlotte, rents have sizeable increases too, indicating that price and rent growth are backed up by fundamentals such as disposable income. Meanwhile, most of them have national flipping and fraud ranked in the bottom quantile, suggesting low bubble risk.
- For more information on how the Market Health Indicator is constructed, please see previous blogs, Health of the Housing Market in the Top 100 Cities, Part I and Part II.
- CoreLogic HPI tier 11, Rental Trends, Flipping Index and Fraud Index were used in the analysis.
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