Soaring House Prices Could Mean Mini-Bubbles for Some Markets

While signs of an imminent nationwide housing bubble are slim when put in context, the news may not be as rosy for some cities. Based on an analysis by the Urban Institute, several California locales top the list of U.S. cities most at risk of a housing bubble, including San Francisco and Los Angeles.

As the Urban Institute points out, house prices have been on the rise since 2012, outpacing inflation by 34 percent. However, this rate is nowhere near the runaway price growth seen in the late ‘90s and early ‘00s. Moreover, there’s the question of what relation that growth has to household income and speculation.

The Housing Finance Policy Center’s housing affordability index attempts to boil these numbers down to a more digestible metric by tracking “whether the median household can afford a standard mortgage on a median-priced house.” Right now, those numbers nationwide are looking good. According to the Urban Institute’s analysis, “Today, the median household can afford a house that is $70,000 more expensive than the price of the median house sold.”

That’s good news for much of the nation. But for the cities most at risk of a housing bubble, soaring home prices are combining with a low affordability based on the housing affordability index. After examining the 37 largest metropolitan statistical areas (MSAs), the Urban Institute’s analysis pegs six California cities among their top ten cities most at risk of a housing bubble.

San Francisco-Redwood City-South San Francisco tops the list, tied with San Jose-Sunnyvale-Santa Clarita. Oakland-Hayward-Berkeley slides in at number three, tied with the Miami, Florida area. Los Angeles-Long Beach-Glendale holds the seventh spot, just above Riverside-San Bernardino-Ontario. The Sacramento area is tied for ninth place with Denver, Colorado.

The Urban Institute suggests several factors as possibly contributing to the potential unsustainability of housing prices in these MSAs, including housing shortages and international investment.

Five Star Institute President and CEO Ed Delgado recently addressed the topic of potential housing bubbles during a keynote presentation at the 51st Annual William W. Gibson, Jr. Mortgage Lending Institute at the University of Texas at Austin School of Law. During a presentation entitled “U.S. Housing Market Trends: An Insider’s Perspective,” Delgado warned that several MSAAs are showing double-digit home price appreciation and inventory shortages.

“The patterns we see today in the housing market include some troubling signs,” Delgado said.