The Next Housing Bubble Could Be in These States

When most people read the term “real estate bubble” or “housing bubble,” they likely think of the 2007-08 financial crisis. However, the common man doesn’t know much about bubbles beyond their relationship to the recent economic collapse.

Today, most experts agree that, on a national level, we are not in a real estate bubble. The absence of nationwide or statewide housing bubbles doesn’t mean they’re not forming, however, or that they don’t already exist within some states on a more local level.

In a bubble, the price of an asset — be it housing, stocks or even tulip bulbs — is high because investors believe the selling price will be high or even higher tomorrow. Therefore, demand and price for the asset both increase. The problem is that the demand eventually decreases as supply increases, which leads to a decrease in prices and POP — the bubble bursts, sending shock waves throughout the economy.

GOBankingRates analyzed housing market data and key economic indicators, including change in home values since historic peaks in the last bubble, home price-to-income ratio, home price-to-rent ratio, mortgage affordability and rental affordability, to determine which places are on the verge of a housing bubble.

Several Utah metro areas have seen home values soar past the peak reached during the previous housing bubble. For example, Ogden’s median home value peaked at $218,200 in May 2008 and now stands at $312,300, an increase of about 43%. Salt Lake City, Utah’s largest city and metro area, has experienced an increase of 40.1% in median home value from its peak during the last bubble and now.

The indicators of a housing bubble in Utah go beyond just surges in home values. An important factor is price-to-rent ratio, a ratio that is first calculated based on the area’s median home value divided by 12 times its estimated monthly rent price. Price-to-rent ratios tend to rise during housing bubbles as home prices are overvalued while rents don’t increase at the same pace. Numerous Utah metro areas have experienced notable increases in their present price-to-rent ratios versus historical averages.

For instance, the five-year average price-to-rent ratio in Salt Lake City is 13.97. As of February 2019, the price-to-rent ratio has reached 18.05, the second-highest change observed between current levels and the five-year average in this category. Provo follows just behind, having a five-year average of 14.99, but whose price-to-rent ratio now exceeds 19, another huge increase.

The Washington state housing market is hot these days, and maybe a bit too hot, especially in its largest city, Seattle. A great indicator of this is an increase in inventory, the number of homes available for sale, which happens because demand has largely been quenched while prices may be too high on available homes for the remainder of people who are still shopping for homes.

According to Redfin, in February 2018, there were 2,498 homes for sale in the Seattle metro area. By 2019, the housing inventory had more than doubled to 5,027 available homes for sale. Looking at cities within the metro area reveals similar patterns, such as in Bellevue, where the supply of homes for sale also doubled year-over-year from only 108 available in February 2018 to 271 homes in February 2019.

A major issue in Washington is the rise in the price-to-income ratio in many housing markets. The price-to-income ratio represents the ratio of median home price to median income; when the ratio is high, that means the price of the home is many times the level of the local median income. When this happens, it can mean that home prices are increasing too far out of the range of incomes, which can lead to being priced out. This then can lead to more homes sitting on the market unsold.

The study analyzed metro areas by the difference between two-year and five-year averages in price-to-income ratio and the current ratio. Places with large differences indicate that the current price-to-income ratio is higher than historical averages, and Washington metro areas such as Longview, Kennewick, Yakima, Bellingham, Wenatchee, Walla Walla and Mount Vernon stand out significantly for this factor.

Another key factor is mortgage affordability, a metric from Zillow that calculates the cost of a mortgage as a percentage of income based on local home prices and incomes. If mortgage affordability is currently higher than two-year and five-year averages, that means mortgages have become more costly in proportion to incomes. Evaluating each metro area this way produced a very similar list of places in Washington: Longview, Kennewick, Bellingham, Yakima, Wenatchee, Spokane, Seattle and Mount Vernon all have seen mortgage affordability rise markedly above historical averages.

Most Idaho cities have more than fully recovered from the housing bubble. One notable exception is Hailey, which is among the top places in the U.S. that are still recovering from the 2000s crash. But for the rest of Idaho, home values have soared well beyond their historical peaks in the majority of metro areas.

Metro areas like Sandpoint, Coeur d’Alene and Boise experienced huge surges in home values during the 2000s housing bubble. However, home values in these places have now surpassed their peaks by 19.1%, 35.6% and 34.7%, respectively. Their recent growth has been staggering, with metros like Boise and Coeur d’Alene seeing their median home values increase by more than $40,000 in just a year.

Several places in Idaho rank high in the individual factors measured in the study: price-to-rent ratio, price-to-income ratio, mortgage affordability and rent affordability, in addition to the change in home values since their housing bubble peak. Boise is perhaps the most notable since it is Idaho’s capital and largest city.

Over the last five years, the price-to-rent ratio in Boise averaged about 13.36, meaning that home values are equivalent to a little over 13 years’ worth of annual rent in the Boise metro area. As of February 2019, that ratio has risen to 15.84, which means that Boise home values now are equivalent to nearly 16 years’ worth of annual rent. As a result, Boise ranks No. 9 out of 700 metro areas in terms of the increase in its price-to-rent ratio over the years.

Boise also ranks high — No. 5 out of 369 metros — in regard to the increase in its price-to-income ratio. For the last five years, the average home price-to-income ratio was 3.85, whereas now, it’s reached 4.77. This might not seem like much, but is, in fact, a 41.5% increase over the historical average. Mortgage affordability too has gotten more difficult, as mortgage payments increasingly take up more of average incomes in the Boise metro area.

New Mexico might not have caught the headlines like its neighbor Arizona did during the last housing bubble, but the state had some cities that boomed and then crashed. Los Alamos, for example, reached a peak median home value of $315,900 in August 2007, before plunging over the next five years, reaching a low of $245,100 in March 2012.

Santa Fe, the state capital, was another victim of the 2000s housing bubble, peaking in March 2008 with a median home value of $324,700 for the whole metro area. Home values bottomed out at $249,700 in April 2013, but have recovered since, and now even exceed their previous peak by nearly 15% in Santa Fe.

In Los Alamos, home values are still under their historical peak, but in Santa Fe, the reality is the opposite. In fact, home values in Santa Fe have risen almost vertically over the last year. In the span of just a year, from February 2018 to February 2019, the median home value in the Santa Fe metro area rose more than $50,000.

The price-to-income ratio in Santa Fe has risen noticeably above its two-year average and five-year averages. Home prices are now nearly six times the average income in Santa Fe, whereas for the last five years, they averaged closer to five times the average income.

Wyoming is a fascinating case study in terms of its housing market. Most major metro areas in Wyoming experienced a small bubble and downturn earlier than most of the country, with home values declining at the end of 2004.

They then recovered as the U.S. went through its national housing bubble from 2005 to 2007, but Wyoming metros only experienced a slight bulge and decline compared to the rest of the country — Cheyenne didn’t even have a downturn. However, that metro area is now showing the many signs of a new real estate bubble.

On the state level, Wyoming ranks No. 4 for its increase in price-to-rent ratio compared to its two-year and five-year averages. More significant, on the metro level, Wyoming’s capital Cheyenne ranks No. 1 for the price-to-rent category. For the last five years, the average price-to-rent ratio in the Cheyenne metro area was 13. As of February 2019, its price-to-rent ratio reached 17.4, which is the biggest increase of all 700 metro areas evaluated in this category.

Home values in the Cheyenne metro area have been on a precipitous rise. From February 2017 to February 2019, the median home value grew by over 16%, from $218,300 to $254,500.

Metro areas in Montana have seen large increases in home values in recent years, far surpassing the peaks reached during the last housing bubble. The Bozeman metro area, for example, was one of the places most affected by the 2000s real estate bubble in Montana, and yet its current median home value is nearly 50% higher than its highest point back then. Home values in the Helena area are up 36.6% and in Kalispell, they are up 33.8% from their historical peak during the national housing bubble.

The state of Montana ranks No. 5 in terms of increase in its price-to-rent ratio compared to its two-year and four-year averages. Whereas for the last five years, the state’s price-to-rent ratio averaged 14, now it has reached 15.4, which is also higher than the current U.S. price-to-rent ratio of 12.2.

Billings, which is Montana’s largest metro area, has seen its price-to-rent ratio rise substantially compared to its five-year average, especially with a current ratio of 15.6 as of February 2019 versus a five-year average of 13.6.

Home values in Colorado’s main metro areas have more than recovered since the days of the 2000s housing bubble. In fact, some places, like Boulder, largely passed through the bubble and housing market crash with little damage. At the same time, in a place like Edwards, which is nearby several ski and resort towns such as Vail, home values peaked at $709,300 in May 2008 before they plummeted down to $446,900 by March 2013.

In Edwards, the current median home value is only 3.5% higher than its historical peak. But in major metro areas such as Denver, Greeley, Boulder and Fort Collins, home values now are over 60% higher than during the heights reached in the last housing bubble. In Colorado Springs and Pueblo, the growth in home values has been less, but is still large: In the Colorado Springs metro area, the current median home value is up 40.1% since its high point of $210,800 in May 2007, and in Pueblo, the median home value is up 36.7% since its zenith of $123,600 in April 2007.

Several Colorado metro areas are facing affordability issues. In places like Greeley, Grand Junction and Colorado Springs, rent has been steadily taking up a greater proportion of income over the years. At the same time, the pace of homebuying seems to be slackening in places like the Denver metro area. According to Redfin, inventory has increased substantially year-over-year, from only 4,380 available homes for sale in February 2018 to nearly 6,000 homes available for sale in February 2019.

Texas had an experience somewhat similar to Wyoming during the 2000s housing bubble. Most metro areas saw a small bulge and then correction in home values, but nothing catastrophic.

Home values in all of Texas’ metro areas are higher than their peaks during the U.S. housing bubble, with the Austin metro area’s median home value up 55.6% and the Dallas-Fort Worth metro area’s median home value up 60.4%. In dollar amounts, the growth in Austin has been huge, as the median home value has increased $116,700 from February 2013 to February 2019.

Besides surges in home values, Texas has also seen an increase in its price-to-income ratio compared to its two-year and five-year averages. But perhaps the most noteworthy places with potential real estate bubbles are Midland and Odessa.

These two metro areas have seen the most massive growth in home values in Texas, with Midland home values up nearly 75% and Odessa home values up just under 61% from their respective previous peaks. These two cities also rank highly in the price-to-income category, with Midland seeing a 30.4% increase and Odessa a 29.2% increase over the last five years in their price-to-income ratios.

Oregon was hit fairly hard by the U.S. housing bubble, with most metro areas experiencing high points between 2006 and 2008, followed by a housing market crash. The Bend metro area, for example, peaked at a median home value of $338,100 in October 2006, before dropping down to $176,700 in October 2011, equivalent to a 91% decline.

Since then, Bend has recovered and home values are about 18% higher than during the 2000s housing bubble. However, in major metro areas such as Salem and Portland, home values have surpassed previous peaks by over 30%, while in smaller areas like Albany and Hood River, home values surpassed by over 40%.

As home values have climbed in Oregon, metro areas have experienced a notable increase in price-to-income ratios versus their historical averages. In Salem, five years ago the price-to-income ratio was 3.4. Nowadays, it has risen to 4.74, an increase of 39.4% and one of the biggest increases in the study. The Albany metro area experienced a major increase as well, 32%, from a price-to-income ratio of 3.48 five years ago to 4.59 currently.

Tennessee’s experience in the 2000s housing bubble was comparatively not too bad. Sevierville and Nashville metro areas saw the biggest peaks in home values, at $170,900 in April 2007, and $162,100 in August 2007. Both metro areas have recovered since, but where Sevierville’s median home value is only up 8.7%, Nashville’s is up 57.7%, equivalent to an increase of $93,600. Nashville’s headlong surge in home values, however, might be showing signs of instability.

The Nashville metro area has seen a substantial increase in its housing inventory in the last year. For years, year-over-year inventory was fairly consistent, but from February 2018 to February 2019, the number of available homes for sale jumped up by nearly 2,000: From 8,552 to 10,321 homes for sale.

Nashville’s price-to-income ratio has risen by 28.6% over the last five years, and now exceeds the current U.S. ratio of 3.54.

Looking at home values in California’s metro areas over time reveals how badly the state was impacted by the U.S. housing bubble of the late 2000s. Median home values in inland metro areas like Bakersfield, Madera and Merced are still down more than 20% since their peaks. Places like Riverside, Sacramento, Fresno and Stockton, all among California’s bigger metro areas, all still have median home values that are below their high points during the last great real estate bubble.

Those places are not in danger of a housing bubble. But San Jose very well could be. Its current median home value is $1,230,400, and that’s for the whole metro area — not merely the city of San Jose. That works out to a home value increase of over 65% since its March 2007 high point of $743,800.

San Jose is the main area for a potential housing bubble especially due to its high price-to-rent and price-to-income ratios. Over the last five years, the price-to-rent ratio in the San Jose area averaged 24.54. It now stands at 28.16, a significant increase and also well over double the U.S. price-to-rent ratio of 12.4.

According to the U.S. Census Bureau’s 2017 American Community Survey, the median household income in the San Jose metro area is $105,809. Yet even with such a high income, San Jose’s price-to-income is staggeringly high, having increased 27.8% in the last five years. The current price-to-income ratio is 10.08, meaning that the average home price is over 10 times the average income — compare that value to the U.S. price-to-income ratio of just 3.54.

The mismatch between incomes and home prices can also be seen in the mortgage affordability metric. San Jose currently has a mortgage affordability value of 0.50, which means that mortgage payments consume approximately 50% of average incomes in the area — which is also the largest in the entire study.

The good news is that on the national level, the U.S. is not experiencing a housing bubble. According to the Case-Shiller U.S. National Home Price Index, home prices are currently about 20% higher than the peaks reached between 2006 and 2007. However, as this study makes clear, on the local level many housing markets have far exceeded their previous peaks.

When it comes to protecting yourself from the impact of a housing crash, you don’t have any control over trends in the housing market. However, you can prepare in indirect ways. For example, job security is important as this will enable you to keep earning income, pay mortgage payments and avoid delinquency. If job security is an issue, then the better option might be to rent. Many of the metro areas in this study have high price-to-rent ratios, so renting is the cheaper option and puts the burden of a housing downturn on the owner, the landlord.

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Methodology: GOBankingRates used the following factors to determine which states could be experiencing real estate bubbles: (1) change in median home values from the peak of the last housing bubble (2005-2010) to the current median home value as of February 2019 for the 742 largest U.S. metro areas tracked by Zillow; (2) home price-to-rent ratio for each metro area, which is first calculated at the individual home level, where the estimated home value is divided by 12 times its estimated monthly rent price; then the median of all home-level price-to-rent ratios for a given region is then calculated; sourced from Zillow’s February 2019 index; (3) price-to-income ratio, which measures the ratio of a median priced home to local median income, tracked quarterly up to December 2018, sourced from Zillow; (4) mortgage affordability, which measures the cost of monthly mortgage as a percentage of income, tracked quarterly up to December 2018, sourced from Zillow; (5) rent affordability, which measures the cost of monthly rent as a percentage of income, tracked quarterly up to December 2018, sourced from Zillow.