In a recent CoreLogic report, the company states that in trying to define “what is a housing bubble” and are certain CBSAs possibly bubbling, they have found that one of the key features of a bubble is the popular belief that the selling price will be high tomorrow. The report states that a housing bubble can start with a true rise in housing demand, but there becomes a point when borrowers enter the market under the mindset that fast profits can be made through short-term buying and selling. CoreLogic states that as more borrowers get involved in these speculative transactions, that is when a housing bubble becomes self-fulfilling.
In this report, CoreLogic applies four metrics to the top 100 CBSAs. These metrics are price-to-income and price-to-rent for fundamental factors, the Flipping Index, and the Fraud Index for speculative behavior. The report states that upon applying these metrics 13 overvalued markets were determined to have met all four criteria. Additionally, the report states that in most CBSAs, home prices grew twice as fast as rent, and many CBSAs had national flipping and fraud rankings at the top quartile, indicating significant bubble risks.
Specifically, the report notes that CoreLogic has developed a Flipping Index which tracks the short-term buying and selling activities in local markets. The company defines a flipping transaction as when someone bought and sold the same house within nine months. To add to that, they state that the flipping percentage is the share of flipping sales relative to total sales within each quarter. The report showed that the national flipping percentage was at an all-time high of 6.5 percent during the 2005-2006 bubble years, and fell to 3 percent during the Great Recession. As of Q1 2016 though, it was reported as sitting at around 4 percent.
Additionally, the report states that among the 21 overvalued markets identified by the price-to-income and price-to-rent metrics, the Seattle, Portland and New York CBSAs still have below-national-average flipping activities. Furthermore, CoreLogici states that if the overvalued markets as the CBSAs are defined with abnormal (higher-than-national-average) flipping percentages, the results reduce to 16 overvalued markets among the top 100 CBSAs. The report notes that these markets are all in California, Texas, and Florida.
The report states that in addition to the metrics already discussed, another thing they understand about housing bubbles is the widespread mortgage fraud that accompanies them so the report poses the question “Do we see fraud risk increasing in these 16 identified overvalued CBSAs?”
To answer this, CoreLogic has developed the Mortgage Application Fraud Risk Index in which they have tracked mortgage fraud risk since 2010. For this report, CoreLogic determined through the index that the CBSAs in Texas have below-national-average fraud risk, while the other 13 markets in California and Florida are all above the national level.
DSNews.com, September 21st, 2016