Housing Trends: Health of the Housing Market as of Q3 2017

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Sixteen Markets Signal High Risk, Ten in Florida Alone

Home prices continued to rise in many markets in Q3 2017, 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. However, 16 of the top 100 metro markets – ten 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 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 analysis 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. In addition to these fundamental drivers that justify the level of home prices, 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 investors are speculating on short-term home price gains, and vacancy rates may be elevated. Further, housing bubbles are often accompanied by widespread mortgage fraud.

Figure 1 shows the 16 highest-risk markets of the top 100 metro areas analyzed, ten of which are located in Florida with the other six in California, Louisiana, Nevada and Texas1. Home prices have appreciated more than 40 percent since January 2012 in these metro areas with the exception of Nassau County-Suffolk County, NY and New Orleans-Metairie, LA. Meanwhile, rent appreciated less than half of the home price growth2. All 16 markets are overvalued on the basis of both price-to-income measures and price-to-rent measures. Figure 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 a high risk of mortgage fraud, which might lead to another bubble in those areas.

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Figure 2 shows the ten lowest-risk markets identified in Q3 2017. 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. Although in some of the metro areas home prices have appreciated about 40 percent since January 2012, e.g. Boston and Cambridge, rents have had sizeable increases too, indicating that price and rent growth are backed up by fundamentals such as disposable income. Meanwhile, most of the lowest-risk metros have national flipping and fraud risk ranked in the bottom quantile, suggesting low bubble risk. It is also worth noting that some of the low-risk markets are low risk because they are growing slowly.

The number of high-risk markets has increased by six from Q2 to Q3 in this year. Besides the high price appreciation across many metro areas, flipping activities and fraud activities continue to pick up, signaling more short-term speculation and mortgage fraud, which should be closely monitored.

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

©2017 CoreLogic, Inc. All rights reserved.


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