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New Study Examines the Formation of Housing Bubbles
Jul 26, 2013

Pro Teck Valuation Services' July Home Value Forecast (HVF) Update examines how housing bubbles are created and why the current market indicators are not pointing to another housing bubble at this time. In the July HomeValueForecast update, the authors point out that they have been writing about bubbles for more than 10 years and that a common theme used to describe bubbles in other markets, such as the stock market in 1929, gold prices in 1979-80 and the Japanese real estate market in 1989-90, is that prices rose to levels which could not be justified by underlying fundamentals. They also acknowledge that in the late stages of a bubble, prices keep rising primarily because they are expected to keep rising. Based on their experience and research, the HVF authors refer to the Collateral Analytics "Bubble Indicator," which works in most markets and does not depend on a deep understanding of the underlying fundamental factors. "The rapid recovery in home prices in a number of U.S. metros already had some observers to suggest that we are in another home price bubble," said Tom O'Grady, CEO of Pro Teck Valuation Services and Michael Sklarz, principal of Collateral Analytics. "Our feeling is that while price increases have been sharp, they should be viewed as corrections to the overshooting of prices on the downside in the 2009-2011 period and not the beginning of new home price bubbles." The update also demonstrates that looking at price changes over a five year time frame is sufficiently long to filter out shorter-term trends and examined the same findings when looking at Japan's real estate market in the 1989-90 bubble period as well as historical and current price trends in the Los Angeles housing market. "Our finding was that a simple measure of how much the market has increased over a five-year period has proven to be an excellent indicator of most bubbles," said O'Grady and Sklarz. "In the case of the U.S. stock market over the past 100 years, we found that whenever the five-year rate of change of the S&P 500 Index has exceeded 200 percent, a significant market top has occurred followed by overall stock market crashes."   This month's Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by its market condition ranking model. The rankings are run for the single family home markets in the top 200 CBSAs on a monthly basis to highlight the best and worst metros with regard to a number of leading real estate market indicators, including: sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio and foreclosure and real estate-owned (REO) activity. "All of the top 10 markets this month are exhibiting positive trends in all of the market indicators we follow," said Sklarz. "Two new entrants to the list are Cambridge, Mass. and Providence, R.I. from New England, which is interesting because the Northeast had been lagging the nationwide real estate recovery. Other markets included in the top are in Texas and in North Carolina."
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