While the nation has enjoyed nine straight years of economic growth and is on track to experience the longest expansion in U.S. history, the specter of the housing bubble and recession still lingers. At the EPIQ 2018 session “Economic Outlook & State of the Housing Industry,” CoreLogic Chief Economist Dr. Frank Nothaft revealed his forecast on the possibility of another housing bubble coming in the next few years.
Home prices have steadily risen from the trough in 2011 following the previous housing bubble. Over all, national prices have risen 57 percent. Even adjusting for inflation, the average prices of some areas are more than double what they were at the nadir of the recession, while in other areas they exceed the pre-recession peak in 2006. But does that mean these homes are becoming overvalued?
To assess that, Nothaft turned to the Market Conditions Indicator (MCI), which assesses the ratio of average income to home prices in each metropolitan statistical area (MSA). If prices are much higher than income based on the historical trend in an MSA, it could be overvalued. Using these criteria, we find that (as of May 2018) 34 percent of MSAs are flagged as overvalued. The last time the nation had this level of overvalued homes while home prices were rising was in 2003. By November of 2006, that number had doubled, with over 2/3 of MSAs identified as overvalued.
The sharp spike in overvaluation between 2003 and 2006 created the original housing price bubble. A similar trend could spell danger for the housing market. Nothaft concluded, “If we do see an acceleration of home price growth on a national level over the course of the next couple of years, I think we do run the risk of being in another valuation bubble. I don’t think we’re there yet, but I do think we run that risk.”