Will the Housing Market Crash? These U.S. Cities Are Most at Risk of a Real Estate Bubble

The 2008 housing market crash rocked the U.S. economy. Now, with real estate prices on the rise across much of the country, some people are wondering if it’s time for a big slowdown. Fifty-eight percent of Americans surveyed believe there will be a real estate bubble and housing price correction in the next two years.

But those waiting for a real estate bubble to pop before they buy might be waiting for a long time, at least according to a new study from investment firm UBS. While some U.S. cities are overvalued, none are yet in bubble risk territory.

These U.S. cities have the most overvalued housing markets

A piece by artist Damon Rich is shown at the Queens Museum of Art in 2009. | Mario Tama/Getty Images

According to the UBS Global Real Estate Bubble Index, San Francisco, Los Angeles, and New York are the most overvalued markets in the U.S., and housing price increases in those cities have outstripped income gains in recent years. But none close to being a bubble, which occurs when the price of an asset, whether it’s houses or tulips, greatly exceeds its intrinsic value, as high demand and speculation push costs up.

San Francisco is the closest U.S. city to bubble territory, according to the report. Home prices in the tech hub are up 80% in the past six years, with a 12% rise in the past year alone. Meanwhile, incomes are only up by about 20% in the past 10 years.

Prices are also on the rise in Los Angeles, though the increase isn’t as dramatic as in San Francisco. In L.A., prices are still below their 2006 peak, when adjusted to inflation. A lack of supply is helping to drive prices higher.

In New York, home prices are up by 25% since 2012, while incomes have risen by less than 10%. However, inflation-adjusted prices have fallen slightly over the past year.

Of the 20 world cities UBS ranked, only Chicago is undervalued. Boston is the only American city on the list that is fairly valued.

Where the bubble risk is highest

While the U.S. isn’t at risk of real estate bubble, the same isn’t true for Canada. Toronto and Vancouver are both in bubble risk territory, as are Hong Kong and Munich. London and Amsterdam are also in the red zone.

In many cities, foreign investors are snapping up properties, driving prices higher and shutting out local residents. Some cities are responding by making it more difficult for those investors to buy homes and condos. In 2017, Toronto began imposing a 15% tax on foreign buyers. That’s helped stabilize housing prices.

Such policy moves can trigger a market correction. A rise in interest rates and tightening lending conditions can also “abruptly end a real estate boom,” the report noted.

Warning signs on the horizon 

Home Foreclosure
A sign advertises a bank-owned house for sale in Pasadena, California, in 2009. | David McNew/Getty Images

Bubble or not, some experts say there is reason to be worried about the housing market in the U.S. Rising interest rates and high prices are depressing demand and causing sales to dip. Especially in the West, “affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points,” said Lawrence Yun, the chief economist for the National Association of Realtors.

Another potential problem? Baby boomers, who own 32 million homes, are set to start selling off their property en masse in the coming years. That coming exodus is “spurring fears of a bursting ‘generational housing bubble’ in which homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners,” according to a report from Fannie Mae.

The current environment is different than 2008. Then, risky lending and complicated investment vehicles tied to mortgages eventually led to a crash. While a correction might be on the horizon, a major crash like the one that happened a decade ago isn’t likely. But bubbles are notoriously hard to recognize until after they’ve popped. Some are worried that people have their heads in the sand when it comes to housing.

“It is 2005 all over again in terms of the valuation extreme, the psychological excess and the denial,” money manager James Stack, who predicted the last housing crash, told Bloomberg. “People don’t believe housing is in a bubble and don’t want to hear talk about prices being a little bit bubblish.”

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