Real estate bubble 2.0? Regional real estate markets are starting to look like they did in 2007

When the US housing bubble burst more than a decade ago, it brought the global economy to its knees. It turned out that the multi-year real estate boom up until the early 2000s was hiding skeletons. Home buyers, driven by fear of losing out on home price gains, were stretching themselves far beyond their financial means. And jealous lenders were giving mortgages (or rather, subprime mortgages) to people who historically would not have qualified. As that credit rushed in, it helped fuel the housing boom. But as the housing market corrected itself, those bad loans created a foreclosure crisis that pushed many of the nation’s largest financial firms, including Bank of America and Citigroup, to the brink.

Fast-forward to today, where the US housing market is once again going through an historic housing boom. In the last two years, US home prices have increased 34.4%, including a 19.8% jump in the last 12 months. That 12-month increase is more than four times the historical annual average (4.6%) recorded since 1987. It is also well above the largest 12-month price increase (14.7%) recorded in previous years. to the financial crisis of 2008. .

Our ongoing real estate boom has more economists pondering the most feared word in real estate: “bubble.” In March, investigators at the Federal Reserve Bank of Dallas sent chills through homebuilders and real estate agents when published a paper titled “Real-time market monitoring finds signs a US housing bubble is brewing.” Researchers at the Dallas Federal Reserve found that home prices were decoupling from economic fundamentals (ie, household income). However, if a housing correction occurs, Dallas Fed researchers don’t think it will cause macroeconomic problems like we saw in the last bubble. Unlike the last round, they write, “household balance sheets [today] They seem to be in better shape, and excessive borrowing doesn’t seem to be fueling the housing market boom.”

That said, some regional housing markets could be in the midst of a housing bubble. At a minimum, many markets have exorbitant prices compared to what local income levels can support. that is what Fortune found after looking at an analysis of the Real Estate Initiative at Florida Atlantic University. Each month, university researchers calculate how overvalued or undervalued home prices are in America’s 100 largest housing markets.

In their own words, here’s how the Florida Atlantic University researchers read their housing analysis: “A positive score represents a premium, implying that the average property in a metropolitan area is selling for above its implied historical price.” A negative score represents a discount, implying that the average property in a metropolitan area is selling below its implied historical price.”

Let’s look at the data.

See this interactive chart on Fortune.com

In the latest reading for March, Florida Atlantic University researchers found that each of the 100 largest housing markets in the United States was overvalued relative to what the market’s economic fundamentals would support. That includes 44 markets overvalued by at least 30% and 13 overvalued by at least 50%.

The most expensive markets are Boise (75%); Austin (66%); Ogden, Utah (63%); Las Vegas (60%); and Atlanta (60%). All of those places have seen an influx of new residents amid the pandemic’s “work from anywhere” boom. That, in part, explains why home prices there have soared well above what local incomes can afford. It also begs the question: If a recession hits in 2023 and employers finally have the economic muscle to force employees back into the office, will those housing markets be at greater risk of a home price correction?

To find the housing markets that are most fairly priced relative to household income, just look to places that saw an exodus of workers during the pandemic. Case in point: The New York City and San Francisco metro areas are only 3% and 13% overpriced, respectively.

Mark Zandi, chief economist at Moody’s Analytics, doesn’t see a real estate bust over the next year. However, he says “overvalued” real estate markets could see home prices drop 5% to 10% over the next 12 months, while national home price growth would stall at zero. Why? The economic shock caused by rising mortgage rates this year, he says, should ultimately slow the rate of house price growth. We are already seeing signs of a cooling off in the real estate market.

While Moody’s Analytics’ own research finds that 96% of housing markets are overvalued, Zandi won’t call this a housing bubble. For it to be a housing bubble, it would need both overvaluation of house prices and speculation in the market. Unlike the FOMO-driven real estate market of the 2000s, Zandi doesn’t think speculation is fueling our ongoing boom.

See this interactive chart on Fortune.com

What is remarkable about the ongoing housing boom is the whiplash. Just two years ago, the housing market was reasonably priced relative to income (see chart above). As of March 2020, only nine housing markets were overvalued by more than 10%, according to a calculation by Florida Atlantic University. Back then, Spokane, Washington (26% overvalued) was the most overvalued real estate market. As of March 2022, Spokane is now 55% overpriced, which doesn’t even put it in the top five, while 90 of the 100 largest markets in the country are overpriced by 10% or more.

At first glance, one might assume that the COVID-19 recession dragged down the March 2020 numbers. It didn’t. The ratios created by Florida Atlantic University researchers were essentially the same in January 2020 as they were in March 2020. In a few words: March 2020 is a good benchmark.

The difference between March 2020 and March 2022 speaks to how historically fierce the real estate market has been during the pandemic. In a matter of two years, we have gone from a normal housing market to one that is historically overvalued.

See this interactive chart on Fortune.com

To find a housing market that closely resembles the market today, you would have to travel back to the years before the 2008 housing crash. In March 2007, 99 of the 100 largest housing markets in the country were overvalued; 40 markets were overvalued by at least 30% and 19 by at least 50%.

While the top-line numbers in March 2022 and March 2007 are eerily similar, there is one surprising difference. In 2007, many of the most expensive real estate markets in the country were in California, New York, and Florida. This time Florida has a large concentration of overvalued markets, but California and New York (which have seen an increase in emigration during the pandemic) rank much lower. Look no further than Los Angeles. In March 2007, it was overvalued by 62%. As of March 2022, Los Angeles has a 10% markup.

See this interactive chart on Fortune.com

The last housing bubble was anything but uniform. As the housing market crashed during 2008, overvalued markets like Phoenix and Las Vegas were completely crushed. Not only were home prices in those markets booming, but so was new construction. But as the market tanked, Phoenix and Las Vegas became oversupplied with sprawling new subdivisions. That oversupply drove home prices down faster and made the foreclosure crisis in those markets even worse.

This time, Phoenix and Las Vegas are once again among the most expensive real estate markets. As of March 2007, Phoenix and Las Vegas were 59% and 72% overpriced, respectively. In the latest reading from Florida Atlantic University, those two markets are nearing their previous highs. As of March 2022, Phoenix is ​​55% overpriced, while Las Vegas is 60% overpriced. Worse still: Phoenix is ​​once again among the US leaders in new construction. If a housing correction occurs, Phoenix could be oversupplied quickly.

If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.

This story originally appeared on Fortune.com

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