Are These Cities’ Housing Booms at Risk of Collapse?

October 26, 2018 by Sam Stebbins

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The American housing bubble that wreaked havoc on the global economy was a long time in the making. Largely the product of exploitative lending practices that put people in homes they could not afford, the housing market bust dragged the median American home value down 37% — from a pre-recession high of $230,000 in 2005 to a post-recession low of $145,000 in 2011.

Today, with the housing collapse a decade behind us, new regulations safeguard home buyers from predatory lenders. During that time, home values have regained the value lost during the recession — and then some.

While steady year-over-year growth in home value is generally considered healthy, too much growth too quickly can lead to market instability and risk of a collapse in the long term — and in some U.S. cities, home values might be climbing too fast.

Click here to see the cities’ housing booms at risk of collapse.

In four U.S. metro areas — Greeley, Colorado; Kennewick-Richland, Washington; Dallas; and Houston — the typical home is worth over 75% more than its peak value before the last housing bubble. For reference, the typical American home is worth 11.3% more today than its pre-recession peak.

While strong populations growth rates partially explain the climbing home values in these cities, problems can still arise when housing prices climb so fast. In an interview with 24/7 Wall St., Daren Blomquist, senior vice president of communications at ATTOM Data Solutions, explained that soaring home values ultimately reduce affordability. “That’s always a dangerous pattern to have and something that can develop into a bubble if it’s not already,” Blomquist said.

Whether or not the housing markets in these cities are an economic disaster waiting to happen remains to be seen, but such rapid growth in home value is not sustainable. “The disparity between incomes and prices is going to have to hit a wall at some point,” Blomquist said. “Now, that may not mean that the bubble pops, but it’s [unlikely] that pattern can continue indefinitely.”

Methodology

To identify the cities that may be at risk of a housing collapse, 24/7 Wall St. reviewed quarterly median home price data for 150 metro areas from real estate data firm ATTOM Data Solutions. We reviewed the four metro areas with the greatest percent change in median home value from their pre-recession high to current levels. Ten-year population change is for 2007 to 2017 and came from U.S. Census Bureau’s American Community Survey. Median home value-to-median household income ratio was calculated with 2017 data, also from the ACS.

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4. Greeley, CO
> Home price chg. from pre-recession peak: 76.8%
> Current median home price: $327,000
> Pre-recession peak: $185,000 (Q3 2005)
> Median household income: $68,884
> 10 yr. population growth: 25.0%

The typical home in Greeley, Colorado, is worth $327,000 — 76.8% more than the peak value of $185,000 before the recession. Over the same time period, the typical American home appreciated in value by a much more modest 11.3%. While steady growth in median home value is a good sign, rapidly rising prices often signal a housing bubble as these increases are not sustainable over the long term.

Home values are already disproportionately higher than incomes in Greeley. The median home value in the metro area is equivalent to 4.7 times the area’s median annual household income of $68,884, a larger income-to-housing price ratio than in the vast majority of U.S. cities.

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3. Kennewick-Richland, WA
> Home price chg. from pre-recession peak: 80.8%
> Current median home price: $253,000
> Pre-recession peak: $139,900 (Q3 2007)
> Median household income: $63,617
> 10 yr. population growth: 26.8%

The Kennewick-Richland, Washington, metro area is one of just three nationwide where home values are now over 80% higher than they were at their highest point before the recession. After the housing bubble burst roughly a decade ago, the median home price in the area bottomed out at $125,000 in the fourth quarter of 2008. Since then, the median home value more than doubled, now standing at $253,000.

Like each of the other housing markets that could be at risk of collapse, Kennewick-Richland’s population is growing rapidly. There are now approximately 290,296 metro area residents, up 26.8% over the last 10 years, a period when the vast majority of metro areas’ populations grew by less than 15%. Such rapid population growth has contributed to the rise in real estate prices at potentially unsustainable rates.

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2. Houston-The Woodlands-Sugar Land, TX
> Home price chg. from pre-recession peak: 85.3%
> Current median home price: $231,563
> Pre-recession peak: $124,964 (Q3 2007)
> Median household income: $63,802
> 10 yr. population growth: 22.4%

One of the largest metro areas in the United States, Houston may also be in the midst of one of the nation’s largest housing market bubbles. The typical metro area home is now worth $231,563 — 85.3% more than the worth at the highest point before the recession hit.

Part of the reason home values have grown so fast in the Houston metro area is that they were not as affected by the recession as most other places. The typical Houston area home lost just 8.7% its value from its recession high of $124,964 to its post recession trough of $114,054. For reference, the typical American home lost 37.0% of its value from its pre recession high in 2005 to its post recession low in 2011.

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1. Dallas-Fort Worth-Arlington, TX
> Home price chg. from pre-recession peak: 85.9%
> Current median home price: $261,250
> Pre-recession peak: $140,500 (Q3 2006)
> Median household income: $67,382
> 10 yr. population growth: 20.4%

The median home value in Dallas, Texas, tumbled by 15.1% from $140,500 in 2006 to a post recession low of $114,054 in 2012. If area homes were overvalued then, they may be due for an even larger correction today. The typical home in Dallas is now worth $261,250, nearly 86% more than the value at the brink of the housing bubble in the mid 2000s. Because of rising home values in the metro area, Dallas is less affordable than many cities. The typical metro area home is worth 3.9 times the median household income in the city, a larger affordability ratio than in most other U.S. metro areas.

Still, rapidly climbing home values are not necessarily a harbinger of a housing bubble in places growing as fast as Dallas. In the past decade, the metro area’s population grew by 20.4%, far greater than the comparable growth rate in most U.S. metro areas.