The Not So Obvious Real Estate Bubbles

We all know about the high price of real estate in San Francisco and Los Angeles. Both metro areas boast one of the highest Median Home Price to Median Income ratios in the country. In 2018, the ratio for Los Angeles was an eye-watering 9.44 times median income. San Francisco was not too far behind with a ratio of 9.24 times median income. The sheer unaffordability of many homes has spawned a crisis of homelessness in those cities. Even tech workers, whose high wages have pushed up real estate prices in Silicon Valley, are forced to sleep in their cars and vans.

Yet those real estate markets are not technically in a bubble, and their ratios are just a shade over one standard deviation of their historical house price to income ratios. For instance, LA's historical ratio for the past 29 years has been at a lofty 7.11 times income, not too far from the current 9.44 times income. The same holds true for San Francisco. Its historical average is 7.57 versus the current 9.24 times income.

Even the global cities of Miami and New York are well within their historical averages. Miami's affordability ratio for 2018 was 6.06 times income - not far from its historical average of 4.71. New York's affordability ratio for 2018 was 5.25 times income - a shade below its historical average of 5.26 times income.

Median House Price to Median Income Ratios
Metropolitan Area	2018	Mean	Std Dev	Z Score
Los Angeles-Long Beach-Anaheim, CA	9.44	7.11	2.14	1.09
San Francisco-Oakland-Hayward, CA	9.24	7.57	1.65	1.01
Miami-Fort Lauderdale-West Palm Beach, FL	6.06	4.71	1.54	0.88
New York-Newark-Jersey City, NY-NJ-PA	5.25	5.26	1.17	-0.01

So where are the bubbilicious markets? Where have home prices strayed very far from their historical affordability ratios? Does Midland, TX come to mind? How about Lubbock, TX? Birmingham, AL? All these places had affordability ratios of less than 4 times income in 2018 - below the US national average of 4.13 times income. But all are solidly in bubble land with affordability ratios more than 2 times their historical averages since 1990.

Midland, TX ratio stood at 3.08 in 2018 - almost three standard deviations away from its historical mean of just 2.33 times income. The probability of the ratio going higher is just 0.17%. Lubbock's ratio of 3.03 times income in 2018 is 2.58 standard deviations away from its historical mean of just 2.59 times income, giving an upside probability of 0.49%. Birmingham, AL's upside is slightly better 0.64% because its 2018 affordability ratio of 3.86 times income is 2.49 standard deviations away from its historical mean of 3.34 times income.

 According to data tabulated by Harvard University's Joint Center for Housing Studies, 37 metro areas out of 382 metros are in bubble markets:

None of them, with the exception of San Jose, CA of Silicon Valley, are in obvious real estate bubbles.

Will their affordability ratios normalize or have they reached a permanently higher plateau? Only time will tell. But if they do, the results can be just as catastrophic for the homeowners.

Only three metro areas out of 382 are in a depression. Their affordability ratios in 2018 were way below their historical mean:

1. Cape Girardeau, MO
2. Beckley, WV
3. Decatur, IL

The upside probabilities for these areas? More than 98%.


Source: State of the Nation's Housing, Joint Center for Housing Studies, Harvard University