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posted on 09 September 2017

Ten Markets Signal High Risk, Eight In Florida Alone

from CoreLogic

-- this post authored by Bin He

Home prices continued to rise in many markets as of Q2 2017, reflecting rising homebuyer demand and a low for-sale inventory. As CoreLogic Chief Economist Frank Nothaft recently observed, the for-sale inventory as a share of all households is the lowest Q2 reading in over 30 years[ 1].

Most markets are still healthy or have relatively low risk, according to the CoreLogic Market Health Indicator. However, 10 of the top 100 metro markets - eight in Florida alone - have been identified as high-risk markets.

The CoreLogic Market Health Indicator evaluates whether individual markets have high, normal or low risk by analyzing several economic factors. First, it compares home prices, using the CoreLogic Home Price Index (HPI) against the long-run sustainable levels that can be supported by local market fundamentals, such as disposable income. Because most homeowners budget a portion of their income for shelter costs, and these costs are generally related to home prices, there is an established long-term relationship between income levels and home prices. Second, it looks at the appreciation of home prices relative to rents. Renting is an obvious alternative to home ownership, and over the long run, market forces should equalize the cost and benefits of home ownership and renting. If home prices deviate too far from rents, then a correction is due sooner or later. Besides the fundamental drivers that justify the level of home prices mentioned above, the analysis also accounts for speculative belief measured by the CoreLogic Flipping Index and CoreLogic Fraud Index. If the Flipping Index is too high, then investors are speculating on short-term home price gains and vacancy rates may be elevated. Further, housing bubbles are often accompanied by widespread mortgage fraud1.

Figure 1 shows the 10 highest-risk markets of the top 100 metro areas analyzed, eight of which are located in Florida with the other two in Louisiana and California2. Home prices have appreciated more than 50 percent since January 2012 in these metro areas with the exception of Jacksonville and New Orleans. Meanwhile, rent appreciated at a rate less than half of the home price growth. All 10 markets are overvalued on the basis of both price-to-income measures and price-to-rent measures. Table 1 also shows the national ranking for flipping and fraud risk in these metro areas. As we can see, most of them have flipping and fraud ranked in the top quantile, indicating short-term speculation as well as high risk of mortgage fraud, which might lead to another bubble in those areas. It is worth noting that Florida has lending and property characteristics that correlate with elevated fraud risk as four of the eight high-risk Florida markets are in the top 10 fraud risk ranking and the other four are in the top 20.

Figure 2 shows the 11 lowest-risk markets identified in Q2 2017. In these markets, the price-to-income and price-to-rent ratios are in line with historical levels and the flipping and fraud risk indicators are low. Although in some of the metro areas home prices have appreciated about 40 percent since January 2012, e.g. Boston and Cambridge, rents have experienced sizeable increases too, indicating that price and rent growth are backed up by fundamentals such as disposable income. Meanwhile, most of the lowest-risk metros have national flipping and fraud risk ranked in the bottom quantile, suggesting low bubble risk.

Source

http://www.corelogic.com/blog/authors/bin-he/2017/08/health-of-the-housing-market-as-of-q2-2017.aspx


Footnotes

[1] CoreLogic Home Price Insights Q2 2017

[2]CoreLogic Single-Family Combined HPI, Rental Trends, Flipping Index and Fraud Index were used in the analysis.

© 2017 CoreLogic, Inc. All rights reserved.

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