posted on 27 December 2015
-- this post authored by Melissa Allison
No one wants a return to the grim days of the housing crisis, when home values plunged until 31.4 percent of mortgage holders owed more on their homes than the dwellings were worth.
In some parts of the country, such as Las Vegas, many people are still recovering from that spiral.
It's harrowing to imagine another housing bubble already, and the good news is that Zillow's economists and most of the 66 experts who responded to questions about a bubble in the fourth quarter 2015 Zillow Home Price Expectations Survey, administered by Pulsenomics LLC, think no major U.S. markets face any significant risk of a bubble for the next five years.
The more sobering news is that some of those experts think certain markets - particularly New York and San Francisco - are already in a bubble. Ten or more experts think there's a risk that Boston, Los Angeles or Miami will enter a bubble in the next three years.
The reasons for these responses depends in part on how someone defines a bubble.
"There is no standard, chiseled-in-stone definition of what a bubble is," explains Grant Thrall, president emeritus of the American Real Estate Society and founder of an advisory firm called Business Geography Advisors.
Some people evoke former Fed Chairman Alan Greenspan's term, "irrational exuberance," and few experts think the entire U.S. economy is riding that wave again.
However, if a housing bubble is a market in which home prices have reached unsustainable levels given the economics of their local markets, then Thrall joins the 22 experts who say San Francisco is currently in a bubble. He's also among six who believe Seattle prices are that frothy.
Will they stay or will they go?
In Thrall's case, he questions whether the international buyers and real estate investment trusts that have driven up prices in those markets will hold onto the properties.
"It remains to be seen if they can manage these single-family homes like an apartment complex. The cost might exceed whatever profit they can get out of it," he said.
An expert who agrees that San Francisco and Seattle are in a bubble, and adds New York and Houston to that list, is David Wyss, former chief economist at Standard & Poor's and an adjunct professor at Brown University.
"The question is not so much how overpriced they are, but why they're overpriced," Wyss said.
He points to investment buyers as well, particularly people who spend more than they believe homes are worth because they think they can quickly turn a buck.
"I worry that prices are getting above where the natural market would take them," he said.
Andrew Schaffler, director of listed real estate securities for Madison International Realty, doesn't think any markets are truly experiencing "irrational exuberance" because lending has become mostly prudent, and the people buying homes can afford them.
He thinks the lack of housing - a legitimate economic factor - might have driven prices higher than the market would otherwise bear in certain areas. San Francisco and Houston might already be in a bubble, he said, driven by increasing unmet demand from well-compensated tech and oil workers.
Revenge of the nerds
The phenomenon is well-known, with The Onion joshing in a headline last month that "Housing Prices Spike As Tech Employee Takes Stroll Through Neighborhood."
"It doesn't mean it will unwind in as flashy a fashion as in the last cycle," Schaffler said.
The only expert among 66 respondents to Zillow's bubble question who believes all 20 markets listed, from Atlanta to Chicago to St. Louis, are in a bubble is mortgage banking veteran and real estate analyst Mark Hanson.
"Bubble 2.0 is being driven by the exact same thing that drove Housing Bubble 1.0 ... unorthodox, unfundamental demand using unorthodox capital," he wrote in a recent newsletter.
About the Author
Melissa Allison writes about real estate transactions and trends for Zillow Porchlight.
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