Bubble: Handicapping the Horserace

by Alex Stenback on August 24, 2005

Ball_1The estimable WSJ online’s real estate journal has an article up which dissects the raft of recent studies released by economists, mortgage insurers, and other smarties assessing the risks in various housing markets nationally. 

Spurred on by the growing concern that America’s housing market is heading for a crash, a number of top economists are producing lists that rank the metropolitan areas most likely to experience a sharp drop in housing prices. The problem is that these studies, which look at factors from local income to lending practices, come to strikingly different conclusions. Even so, the raft of data can provide useful clues for home buyers and investors wary of getting in at the top.
Economists Handicap Housing Markets [RealEstateJournal]

Of course another way to interpret the fact that all of these studies "come to strikingly different conclusions" is that none of them really has a clue which way things will break with any local housing market.  "Predicting" any market is difficult (as we’ve said before) to the point of folly in many cases, but given enough studies one of them might eventually be right, so they are still worthy of consideration. As the old saw goes – even a broken clock is right twice a day. 

That said, we did drill down a bit on the other side of the link below to see where our beloved Twin Cities rank in some of these studies (with Charts!), so click away.

PMI: Leading Provider of Mortgage Insurance
Ranked the Twin Cities the 17th riskiest market, using [a proprietary model] which "involves such factors as the labor market, local incomes and mortgage payments."
Here’s The Study [pmi.com]

National City: Leading Mortgage Wholesaler
Though we didn’t parse the data enough to arrive at a rank, the study puts the Twin Cities at 27.8% OVER valued, which falls below their "significantly risky" threshold of 30% over-valued. Their methodology, from the WSJ: "examines the ratio of home prices to household incomes in metro areas and tries to explain the variation in these ratios on the basis of population density (a proxy for shortages of space), relative income levels, mortgage rates and historically observed differences in prices. (Those differences, he says, reflect such things as climate, schools and cultural attractions.)"
Here’s The Study [PDF via National City] But let’s look at some graphics taken from it:

Aug 2005, Source: National City

The chart above shows were house prices should be (the blue line,) and where they are (in green.)  Interesting to note here is that in National City’s previous study, which we also pointed out, had the Twin Cities at 10% over valued, which was also right below the "Risky" threshold (then at 20% Over-valued.)  Change in methodology? Or did they move the line?  Here’s the graphic from the previous study:

Jan 2005, Source: National City

Those two charts raise some interesting questions – it appears just from looking at the graphic that we are in the same spot – just below the red [Danger!] area, but wonder why the "significant risk" line now sits at 30%, rather than the previous 20%?

So, what to make of all this?  By most measures, Twin Cities real estate is still affordable.  According to the Minneapolis Area Association of Realtors, the median income is still 107% of what’s necessary to affordably buy (housing payment 27% of income) a median priced home with 5% down, and that’s good news.

Real estate, like any other market, will have it’s ups and downs, and we’ve seen no credible data that shows renting is a better alternative to buying in our market just yet – as long as you can afford the payment, and are able to own for the relative long term (5+ years,) don’t let the bubble talk scare you.

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