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Updated on Thursday, November 16, 2017
The housing market is heating up again. Home prices have risen faster than income growth in the past five years, and the combination of low housing supply and increasing demand is driving home values ever higher.
Could we be in danger of another housing bubble?
Economists don’t seem to be too worried about the national housing market.
Across the U.S., increases in home prices have outpaced income growth by 34 percent since 2012, driven by economic expansion. However, this percentage is less than half the pace seen between 1997 and 2006, according to a recent Urban Institute study.
For the most part, homes are still affordable relative to household incomes, experts say.
According to the Urban Institute, a Washington D.C.-based think tank that carries out economic and social policy research, a median-income household can afford a house that is $70,000 more expensive than the price of the median house sold on the market. In contrast, in 2006, there was a $22,000 shortfall between what the median household could afford and the median sales price.
“Yes, prices are high, yes, the market is expensive, and yes, housing is unaffordable for some people, but that does not mean we are in a bubble yet,” Nela Richardson, chief economist at Redfin, a Seattle-based real estate and technology company, told MagnifyMoney. “Those attributes of a classic bubble are missing.”
By “classic bubble” attributes, Richardson is pointing to telltale signs of trouble, such as lax mortgage lending standards, rapidly rising mortgage rates and the levels of speculation in the housing market we experienced 10 years ago.
Even as home prices were skyrocketing, soft underwriting practices allowed a record number of people to purchase homes with very low down payments. As the crisis intensified, housing prices began to nosedive and borrowers who bought more home than they could afford eventually defaulted on mortgages.
In the wake of the Great Recession, the federal government implemented stricter mortgage lending regulations that have made it much harder for financially unstable borrowers to qualify for a mortgage loan.
“Any of the mortgages made today [are] just super clean” and there is a historically low default rate, Bing Bai, an Urban Institute researcher, told MagnifyMoney. “We are not in that kind of risk like the risk we had before in previous bubble years.”
Mortgage default rates have fallen to 3.68 percent for single-family homes, not quite as low as pre-recession levels but much better than the peak of 11.53 percent in 2010.
10 Metros at Risk of a Housing Bubble
So, the nation as a whole might not be facing an imminent bubble. However, Urban Institute economists have put certain cities of the country on the “bubble watch” list.
In the study, they analyzed 37 metro areas across the U.S. to find how much housing prices have gone up since their lowest point following the financial crisis and how affordable homes are based on the median income for that city. Below are the top 10 cities in danger of a housing bubble.
#1 San Francisco-Redwood City-South San Francisco, Calif.
#2 San Jose-Sunnyvale-Santa Clara, Calif.
#3 Miami-Miami Beach-Kendall, Fla.
#4 Oakland-Hayward-Berkeley, Calif.
#5 Portland-Vancouver-Hillsboro, Ore.-Wash.
#6 Seattle-Bellevue-Everett, Wash.
#7 Los Angeles-Long Beach-Glendale, Calif.
#8 Riverside-San Bernardino-Ontario, Calif.
#9 (tie) Denver-Aurora-Lakewood, Colo.
#9 (tie) Sacramento-Roseville-Arden-Arcade, Calif.
California snags five of the top eight spots, led by the San Francisco metro area.
In San Francisco, for example, a family earning the median income for the area needs to dedicate at least 70 percent of income for a typical 30-year fixed-rate mortgage, Bai said. The median home sales price is $1.2 million in the Bay Area, according to Redfin and Trulia, an online real estate resource for homebuyers and renters.
The overheated housing situation in the Silicon Valley and Seattle is largely a result of the tech boom during the years of economic recovery, Richardson said. Yet demand is still going strong with healthy job increases despite stunning home prices.
“There’s a lot of money looking for a place to land,” Richardson added.
Some other cities seeing swelling housing prices are in Florida and Texas. Not coincidentally, the coastal real estate markets are where international investors have been pumping in large sums of money in recent years, pushing demand even higher. The Urban Institute reported that California, Florida and Texas are the top U.S. destinations for foreign buyers.
“It’s not just about the local economy in these markets,” Richardson said. “It’s about the global economy.”
Advice for home buyers in super expensive cities
The truth is, experts don’t see a sign of price decline in hot markets any time soon.
“Demand is still there, with low supply, [and] it’s just going to keep prices high,” Cheryl Young, senior economist at Trulia, told MagnifyMoney.
If you are looking to buy in cities where home prices are sky-high and competition is extremely fierce, here is what pros suggest you can do to bid for a desirable house:
Time it right
“Home buying is all about timing,” Young said. “We always say you shouldn’t rush to enter the housing market if you are not ready.”
If you’ve definitely decided to buy, the best time to start looking might be during the fall. Young said home prices are, in general, at their nadir in the wintertime, so you may want to start looking in the fall when prices started to dip as home supply is higher than they are at other times of the year.
Check out our story on why October’s the best time to start looking for your first home.
Come to the table prepared
When you are ready to start looking, you also need to save up for a down payment, Young said.
A good rule of thumb for a down payment is 20 percent. That way you could avoid paying for the additional cost of private mortgage insurance. But the reality is that it’s tough for buyers to put down that much money, especially if you are in a super-expensive market. It’s fine if you can’t save up for 20 percent, but of course the more you can scrounge up, the better.
Also recommended: Have all your financial statements ready and compare mortgage rate offers from several financial institutions to be sure you’re getting the best deal. Avoid these common mistakes homebuyers make before they apply for mortgages.
“Working with someone who knows the local area, who knows how to strategize how to make an offer that is as good as cash or almost as good as cash if you are in a competitive market is very important,” said Richardson.
If you can get preapproved for a mortgage, it will give you a competitive advantage.
“It’s really about showing the seller that you are ready when the opportunity comes up so that you can lock in the purchase,” Young said.