Housing Bubble Overheating in Some Select Markets
The United States housing bubble is still a dirty term in today’s lexicon. Millions of people were forced out of their homes or abandoned them altogether. It was by far the biggest property crisis in American history. So when people read on the news that the housing bubble is heating up, it stokes fear. Fortunately, not everyone needs to be fearful. But if you live in some of these select regions, read on…
But before we reveal what those are, let’s look at some national trends.
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According to the National Association of Realtors, in 2Q 2017, prices rose 6.2% year-over-year, to an average cost of $258,300. Most of these gains are propelled by metro regions, as many populated locales have increased double-digits. Inventory is also lower—about nine percent nationally. With near-record lows in unemployment, more people might be opting to stay put longer. (Source: “Are we headed for another housing collapse?,” New York Post, September 2, 2017.)
Also Read: U.S Housing Bubble 2017 Is No Black Swan because It’s Predictable
So, some key stats suggest that this bubble is more a classic supply/demand dynamic. Unlike the colossal everybody-gets-approved lending bubble that saw millions of undercapitalized home owners take possession, this bubble is simple to understand. It’s regional in nature, and it’s driven by low unemployment and tight supply.
In fact, some of the bubbly places such as Portland, Oregon, and Silicon Valley have some of the toughest “Not In My Back Yard” (NIMBY) laws in the nation, making new housing development challenging. It’s almost a self-fulling prophecy in a way. The regions experiencing rapid growth develop a network of upper-middle and high net worth executives who frown on urban development in their districts. But the paradox is, due to rapid economic expansion and interest from outside labor, they’re the regions which need new housing projects the most.
What caused the housing bubble is the lack of remedial action needed to fix it. A bubble is still a bubble, only it’s regional in nature.
When Will the Next Housing Bubble Burst?
Is there another housing bubble? Yes and no. Median prices in mostly metropolis regions are skyrocketing to record levels. It could easily be argued these price gains are unsustainable. But much of the rising U.S. home prices is due to strong employment and rising wage growth in select industries (i.e. Silicon Valley Technology).
But while the major markets grab the headlines, select smaller markets are also doing quite well. The rapidly year-over-year increases are far from bubble levels, as prices are rising from depressed levels. Most are actually still affordable to average home buyer. It seems to be a case of value hunters piling in. In these markets, prices can run further in a low interest rate environment.
| Location | Median Price | YoY Increase (Q2) |
| Buffalo, NY | $84,900 | 34.76% |
| Atlanta, GE | $335,000 | 24.54% |
| Pensacola, FL | $188,650 | 21.01% |
| Cincinnati, OH | $180,000 | 20.06% |
| Knoxville, TN | $198,900 | 19.10% |
| Minneapolis, MN | $269,900 | 17.35% |
| Fort Wayne, IN | $145,000 | 17.03% |
| Indianapolis, IN | $145,950 | 16.85% |
| North Las Vegas, NV | $227,845 | 16.84% |
| Cleveland, OH | $69,900 | 16.69% |
| Lincoln, NE | $219,900 | 16.35% |
| Omaha, NE | $226,000 | 15.90% |
| Orlando, FL | $264,900 | 15.68% |
| Lexington, KY | $246,163 | 15.57% |
| Las Vegas, NV | $269,900 | 14.90% |
| Kansas City, MI | $195,000 | 14.77% |
| Garland, TX | $203,950 | 14.58% |
(Source: “Top 20 Cities Where Home Prices Are Skyrocketing,” GoBankingRates, August 26, 2017.)
Whether small market or big, the universal factor in this housing bubble is supply and demand fueled by brightening economic prospects. Very different from the bubble dynamics a decade ago.
So don’t expect a housing market crash 2017 to occur this year. Interest rates are lower this time around and can remain that way indefinitely. Also, that’s nowhere near the reckless lending and products being used this cycle. But that doesn’t mean it can’t happen beyond 2017, particularly before the onset of the next recession.
But this will be a regional phenomenon driven by a recession and rising unemployment—not a wide-scale misallocation of credit. In fact, credit scores have improved to the best nationally since the housing bubble onset.
The bottom line: This “housing bubble” is not of the national subprime variety; it’s much more regional and will be acutely affected by changes in the business cycle. I believe recession onset in nine to 18 months, with interest rates (as always), being the wildcard.
If you’re looking for the next housing bubble burst to buy-in, think late 2018 or 2019.
