Hi everyone, this is Tom O’Grady, the CEO of Pro Teck Valuation Services. Our most recent Home Value Forecast Update shared some interesting insight into housing bubbles and provided some evidence contrary to some of the media voices we hear to show we are not entering into another housing bubble. In a bubble, market prices become untethered from basic market fundamentals. For housing, some of the fundamentals we look at are price of homes relative to income or affordability, rents, employment, and construction costs. One excellent indicator of Dr. Sklarz’s research is the five-year bubble indicator developed by Collateral Analytics.
Before we look at the bubble indicator for real estate, here we’re looking at it applied to the U.S. stock market over the last hundred years. We found that whenever the five-year rate of change of the S&P 500 Index has exceeded 200 percent, we see a significant peak in prices occur. Some examples we see here are the bubble peaks of 1929, 1987 and 1999/2000. These are followed by the overall stock market crashes of ‘29, ’87 and the dot-com crash of 2000 respectively. Although looking at just the five-year span of appreciation may seem overly simplistic, it is a long enough period of time to look past short-term price fluctuations. It shows when prices are no longer reflective of longer-term earnings growth rates.
To apply this to real estate, we show here land prices in Japan. We applied a threshold of 150 percent growth over the five-year period and it clearly identifies the 1990 bubble peak that occurred in this market.
This 150 percent rule did an excellent job of identifying the bubble peaks in many U.S. metros in the 2005, 2006 period. Here we see the median single-family price for the Los Angeles CBSA along with Collateral Analytics bubble indicator. The 150 percent price change over the previous five-year period was reached in mid-2006 at a median price very close to the peak in this market. When we consider the idea that the U.S. housing market has entered another bubble, we can see here that the most recent five-years of appreciation is far below bubble territory.
We have analyzed all the larger metro markets across the U.S. that have experienced significant increases in home prices over the past year. We do see sharp increases over that time, but the five year look-back doesn’t show anything like the run up to the 2005/2006 peaks. Our feeling is that there was an overcorrection to that peak leaving many real estate market prices below market fundamentals, and what we’ve seen over the past year is better viewed as a correction and not the beginning of a new bubble in home prices.
Moving away from the bubble topic, each month Home Value Forecast and our Monthly Update also ranks the single family home markets in the Top 200 CBSAs to highlight the best and worst metros with regard to a number of leading real estate market based indicators. The Cambridge-Newton-Framingham, MA CBSA was in the list of Top 10 metros this month. All of the important market indicators for this CBSA are showing positive trends on a year-over-year basis, including declining inventory, declining marketing times and lower distressed sales activity to name a few. Here we look at an outlier ZIP in that CBSA: ZIP 01742 in Concord, MA. This is one of the higher-priced markets in this metro. One thing we point out in Home Value Forecast is real estate is local, and this outlier shows that. Here we have a better-capitalized market that is performing very differently than the overall metro that it sits in. The Collateral Analytics Home Price Forecast model predicts this ZIP code will continue to outperform the surrounding metros and move above its previous peak levels over the next several years. There are a number of reasons for this historical and forecasted outperformance of this Concord ZIP code which include the fact that home buyers in this ZIP have historically been better capitalized and there for better able to weather declines in home prices. The average loan-to-value ratio for this ZIP code has historically been between 60-70 percent compared to the approximately 80 percent for the overall Cambridge-Newton-Framingham CBSA.
Home Value Forecast is brought to you by a partnership with Pro Teck Valuation Services and Collateral Analytics. Full text to this update can be viewed here. To view trending charts for 30 major metros and read all our updates please visit us.