U.S. Isn’t in a Housing Bubble, But Some Cities are Suspect

Skyrocketing home prices around the country have caused some concern about a potential housing bubble. But a new report from the Urban Institute claims that those fears are unfounded on a national scale — though there are some urban areas showing signs of trouble.

Home prices have increased 34% faster than the rate of inflation since 2012, according to Urban Institute researchers Bing Bai and Edward Golding. But while that could sound alarming, Bai and Golding say that’s only part of the picture: The real test is whether prices are rising faster than the median family’s ability to buy typical homes.

So the pair looked at the Housing Finance Policy Center’s affordability index, which shows how much house the median household can afford. According to that metric, the hypothetical median family has the ability to pay $70,000 more than the median home-sale price; back in 2006, that same family would be $22,000 short of the median price.


“Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion,” the authors wrote. “At a national level, then, we are not in a bubble and nowhere near the situation we saw preceding the 2008 housing crisis.”

The Urban Institute team also noted that between 1997 and 2006, home prices grew 87% faster than inflation.

Cities of concern

Bai and Golding also compared appreciation in home prices and affordability in the top 37 metropolitan statistical areas, then ranked them in terms of “bubble watch.” Perhaps unsurprisingly, the West saw the greatest representation: The San Francisco and San Jose metropolitan areas tied at number one, with nearby Oakland tying with Miami for third place. The Portland, Ore. metro area tied with Seattle for fifth place.

These areas have significant housing shortages, the authors noted, and are top targets for foreign investments. In addition, “nontraditional investors” have begun purchasing homes in those areas with an eye toward renting them out, another factor driving down affordability.

“This is an important consideration for public policy and affects several issues, including whether the Federal Reserve should continue to increase interest rates and whether states and localities should rethink building and land-use restrictions,” Bai and Golding concluded.

Read the full analysis at the Urban Institute.

Written by Alex Spanko

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  • I personally feel the FED should hold steady and stable. Increasing rates at this point of time, in my opinion, would be suicidal for the housing and lending markets.

    WE are not close to the 2008 crisis, different time, different place and a completed different set of circumstances.

    From 1999 up to the 2008 housing and economic crash was due to a major false growth in the economy, built up by mainly large debt in the hands of the American people, which the Federal Government induced! It was just a matter of time before bubble was to burst and it sure did!

    This brings up another good point for our industry, because values are rising the opportunities are more ready available for us to put the HECM to work to improve a lot of seniors lives out there!

    John A. Smaldone

    • John,

      I have a slightly different view of the details in your comment but not your overall suggestion.

      On the other hand, four (LA, SD, SJ, and SF) of our top thirteen cities by total US population are in California, my home state. If a price bubble is developing in LA, that could spell trouble for the housing industry in California, if not the southwest and even the west if not the entire US. While housing issues are local, their impact if the locality is sufficiently large enough can have a regional if not national impact in and outside of housing.

      Imagine the impact to the confidence in the housing market if the LA housing market fell. This is why it is so important not to just look at the national picture alone. If housing prices in Slab City, CA alone suddenly dropped, the concern for housing prices in Franklin, TN should be nonexistent.

      We need to be careful what data we disregard and what we regard. Aberrations of any size needs to be investigated for facts, patterns, and circumstances so that they can be evaluated as to their potential impact on the housing industry generally.

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