HomeBlog HomeBlog PostsU.S. Home Prices See Significant Gains, but Most Markets Show No Bubble at This Time

U.S. Home Prices See Significant Gains, but Most Markets Show No Bubble at This Time

U.S. Home Prices See Significant Gains, but Most Markets Show No Bubble at This Time

We have been discussing, in recent reports, how the U.S. residential real estate home prices have experienced significant increases in the past year led by very strong sales activity and historically low inventories of homes on the market. One of the best supply/demand indicators which we follow is Median Sold Market Time which, as seen in Figure 1, is currently running at the lowest levels in more than 15 years. Part of the reason for low inventories is that homes which do come on the market are sold more quickly. Among the reasons for less time on the market are more efficient search tools and more informed buyers.

Figure 1 















Months of Inventory Remaining, as seen in Figure 2, is running at historically low levels near single digits. Again, this corresponds to and helps explain the low inventories. However, we do note the significant seasonality of sold market time and that much of this time is related to preparations for closing. That is, a home might sell in two days and then require a month or more to close. In a historical context, both these figures, months remaining inventories and time on the market, are remarkably low and ubiquitous across most individual markets around the country.

Figure 2 

The combination of these important market indicators, along with low mortgage rates, help explain the large price gains in the past year, giving rise to renewed talk that we are in another home price bubble.

To help answer this question, we look at a number of bubble indicators to see if the market is, in fact, in an extreme unsustainable condition. In our previous blog, we mentioned the Price-to-Income Ratio and the Price-to-Rent (annual) Ratio. With regard to the Price-to-Income Ratio, a more refined version is the Affordability Index since it also incorporates mortgage rates to determine how large a mortgage the median income household can qualify for and, thus, what price home can be purchased assuming a 20 percent down payment. Figure 3 shows Affordability Indexes for a number of top CBSAs back to 1983. Affordability Indexes greater than 100 suggest that the median income household has more than enough income to purchase the median price home. As seen, this has been the case for most of the CBSAs for close to the past 40 years. Very low Affordability Index values have been associated with home price bubbles in the past which led us to create Figure 4 showing the current indexes compared to the previous lowest levels. As seen, the index readings of all the Top CBSAs are currently quite a bit higher than previous bubble low affordability levels, and particularly compared to those in the 2005-2007 period. San Francisco, one of the least affordable markets in 2007 is once again, close to previous lows, but no other CBSA is near the 2006 pre-crash levels.

Figure 3 

Figure 4 

Another widely followed bubble indicator is the existing median home Price-to-Rent Ratio. The thinking here is that the two should generally move in tandem since, in the intermediate to longer term, a home is worth the present value of the current and future rents which it can generate. Extreme readings of this ratio in the past have also been associated with home price bubbles. As seen in Figures 5 and 6, nearly all the CBSAs are currently running well below previous peak levels with Denver being the only one meaningfully above and, thus, worth watching. However, average rents move less quickly than prices and some markets, like Denver, will likely see rents catch up a bit over the next few years.


Figure 5

Figure 6


One other factor affecting prices is the expectation of future price increases. These expectations make homes appeal as investments, not just as providers of housing services. Currently such expectations are high, and the media is asking if we are in a housing bubble. Home price bubbles do occur, and we will be closely monitoring these and other indicators to determine if the current market can be classified as in one. However, it should be noted that real estate markets have two primary ways of correcting which are price and time. This is unlike stocks and commodities where bubbles are usually resolved with price declines. In the case of home prices, they have historically been “sticky” on the downside and corrected via time. That is, prices move sideways over time with little change as demand growth and inflation continue to add support. Owners do not generally abandon a home, even if the price declines. There is no panic selling as we have in the stock market. They still need a place to live. The housing bubble and subsequent crash in the mid-2000s were due to a unique set of factors including significant sub-prime lending (leading to many over-leveraged homeowners) coupled with overbuilding in many markets. Neither of these factors are present at the current time which is why we foresee most home price corrections in this cycle being played out in time rather than price.