Bubblette? Twin Cities ‘On The Bubble’

A small sample of the recent search queries that have brought visitors to Behind The Mortgage:

is there a bubble.  housing bubble 2005. the great real estate crash of 2005.  twin cities real estate bubble. home prices too high minneapolis. real estate crash. real estate bubble minnesota.  bubble real estate.

(In case you needed more proof that the prospect of a housing bubble is on a lot of peoples’ minds.)

So, is there or isn’t there?  We think answer to the question was best summarized by Barry Ritholz at our favorite economy & markets blog The Big Picture:

"Home prices are local, and the more likely scenario are regional ‘bubblettes.’…While I doubt there is a full blown bubble in housing, there has been a swift run up in prices due to ultra low interest rates. The significance of this for housing is simple: overvaluation presents a risk of future declines."

This begs the question (which we’ll attempt to answer on the other side of the link below):  Is the Twin Cities housing market one of the ‘bubblettes’?

Is There a Bubble in Twin Cities Real Estate?

Central to this bubble debate is deciding what the ‘correct’ value for a particular market is.  A recent study by National City Corporation compared hitorical home prices, household incomes, and past real estate market corrections and used regression analysis, and a pooled time series statistical approach [used lots of statistical magic/geekery] to determine ‘normal’ home prices for 99 metro areas. In order to assess "bubble risk" they compared these ‘normal’ prices (what they should be) to the actual prices for each metro area.

The study tells us:

• Metro areas more than 20% over-valued are "significantly over valued" (and cause for concern.)
• Metro areas that are between 10% under and 10% over-valued, are fairly valued. 
• Metro Areas between 10% and 20% should be considered cautiously.

As you can see in the chart above (OK not really, we actually had to track down and look at the raw data,) the Twin Cities/Minneapolis is not ‘significantly’ over valued, but checks in at exactly 10% over-valued which is (yuk yuk) "on-the-bubble" between fairly valued and over-valued enough to indicate caution.

Nothing like a big fat "maybe" to answer the Twin Cities bubble question.

Executive Summary and Conclusions [National City]
Download The Full Study [PDF]

Related posts:

1. Twin Cities Real Estate Overvalued, but Less So
2. Bubble: Handicapping the Horserace
3. Where to Live in the Twin Cities
4. Making the Grade: Twin Cities Housing Market Gets a “C”
5. Hear Bubble, See Bubble, but Don’t Speak Bubble