One in five housing markets in the U.S. has now exceeded its historical affordability norm – ‘a strong sign that either a new home price bubble is forming in those markets or that home price appreciation will soon plateau until incomes can catch up,’ says Daren Blomquist, vice president of RealtyTrac.
A new report from the firm analyzes home price trends and foreclosure rates in 475 U.S. counties to determine the level of affordability in those counties. Many of these markets are now showing early warning signs of a home price bubble, where prices over-inflate and eventually decline, RealtyTrac says.
The report also identifies markets where there is little risk for a home price bubble. It uses a combination of three factors to determine the degree of ‘bubble risk’: if the market was less affordable in October compared to its peak price during the 2005 to 2008 housing bubble; if a market was less affordable in October compared to its historical affordability average since January 2000; and if a market had a rising foreclosure rate on loans originated in 2014 compared to loans originated in 2013.
The report shows that in order to buy a median-priced home in one of those 475 counties, as of October, it would require an average of 26% of the median income. Back in 2006, when home prices peaked, it would require an average of 41% of the median income to be able to afford a median-priced home.
Meanwhile, the average foreclosure rate on loans originated in 2014 was 0.25%, up from an average of 0.20% in 2013. About 37% of the 475 counties tracked posted rising foreclosure rates in 2014.
The increase is of concern because it indicates that some borrowers are still over-extending themselves and taking on more house than they can afford. As Blomquist points out, these loans ‘have had less time to sour than loans originated in 2013.’
Blomquist, however, points out that 99% of U.S. markets ‘have not returned to the irrational affordability levels during the previous housing bubble’ – so, in other words, these bubbles are area-specific and not necessarily indicative of a national trend.
What's more, the foreclosure rate on loans originated in 2014 is ‘still significantly lower than for loans originated during the previous housing bubble in most markets,’ he adds.
The report shows that roughly 48% of the markets tracked were, as of October, still ‘affordable’ by historical standards.
Rising home prices, however, are a concern in certain markets, as they impact affordability and raise the prospect of increasing defaults. As of October, about 12% of the 475 counties tracked had already seen home prices surpass the peak levels seen in 2006 to 2008.
Meanwhile, home prices are declining in certain other U.S. markets – some of which never saw prices return to anywhere near peak levels.
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