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Austin, TX leads the pack of biggest US housing bubbles. RYAN KYTE/Getty Images This story is available exclusively to Insider subscribers. Become an Insider and start reading now. Real estate consultant Nicholas Gerli says the next housing crash won’t be “binary.” Instead, it’ll be mostly driven by several overvalued cities where annual home costs have surged. Using this calculation, Gerli shared the top 15 cities in the US most due for a correction. The real estate market may finally be reversing from its breakneck traction, lifting bubble popping woes even closer to the surface.
Data from the St. Louis Fed showed that median home prices skyrocketed almost 33% from spring 2020, driven partially by the mass migration of wealthy remote workers with deeper pockets to smaller, less expensive metropolitan areas. But real estate markets have already begun to seemingly cool down since the Federal Reserve began hiking interest rates in March.
Mortgages have since risen from last year’s historical lows, with the 30-year fixed-rate currently rising to the highest levels in well over a decade. While Freddie Mac pegs the current weekly average rate at 5.3%, there are plenty of borrowers who are brushing up against 6% territory. After months of a massive deficit, housing inventories finally began rising again in March, and rising price cuts of listed homes may now indicate softening markets.
Still, considering the more optimistic metrics in today’s housing market — particularly stricter underwriting standards following the subprime loan crisis and a more balanced own-to-rent ratio — analysts have called into question whether or not today’s high real estate prices are still due for crash like in 2008.
A housing bubble ready to pop?Nicholas Gerli, the CEO of real estate data analytics firm Reventure Consulting, believes that investors should prepare themselves for another housing bubble pop.
“The simplest way to think about it is that home prices are at an all-time high today, both in nominal terms and adjusted for inflation,” Gerli told Insider during a phone interview. “For most of the last 130 years, home prices adjusted for inflation are very stable — they don’t really go up much because the housing market is fundamentally linked to inflation and wages.”
But what happens when this balance seemingly goes far out of whack?
“When there’s then a deviation in home prices above inflation and wages, that’s historically the sign of a bubble,” Gerli suggests.
That’s because eventually wages and home prices have to converge again, whether it’s by wages catching up or by home prices coming down.
According to Gerli, this only marks the second time in US history that home prices have grown rampantly ahead of inflation and wages. The last time was in 2006, just before the housing crash of 2008 — and Gerli warned that prices today are even higher by comparison.
But home buyers don’t necessarily need to panic, suggests Gerli, because the current breakneck growth in home prices is primarily driven by housing markets in a few specific metropolitan areas. He cautions buyers against thinking of a crash in a “binary” way.
“When you do that calculation of home prices to inflation and wages locally, you see that there’s certain areas of the country which are more fundamentally supported today while there’s certain areas of the country that are really leading that bubble,” he explained. “I would say it’s like 15 to 20 different markets that are responsible for most of that growth over the last three to four years.”
For instance, home prices in Las Vegas, NV dipped 60% during the 2008 housing crash, but Gerli believes the downturn will be more muted this time due to less homebuilding activity combined with high demand. On the other hand, prices in Austin, TX only dropped 4% in the last housing crash, but Gerli predicts they’re due to plummet much further from their current sky-high levels.
Beware of cities tangential to techWhen considering the valuation of an area, Gerli considers four factors in conjunction, the first two being a locality’s growth in home prices versus wages and its housing supply, both on the market or in the process of being built. He also examines the presence of real estate investors, who inherently carry more risk because a loss in investor capital creates a hole in demand for a particular market.
Gerli also analyzes an area’s economy, particularly considering whether it’s especially concentrated in any industries that could be hurt by rising rates.
As an example, Gerli listed areas like Spokane, WA, Reno, NV, Seattle, WA, and San Francisco, CA that are especially tangential to technology hubs. These cities are most at risk of a potential tech downturn, said Gerli, who cautioned that many tech firms today are unprofitable and overvalued.
“Tech employs a relatively small amount of people in the US economy compared to all the other industries, but they dominate an exorbitant amount of wealth and housing demand. Now that stock prices are crashing and we’re starting to see layoffs, that’s a big economic risk factor for these housing markets,” he said, referencing specific firms like Robinhood, Netflix, and Better.com which have announced job cuts in recent months.
Austin leads the pack of housing bubblesTo estimate the US’s current largest real estate bubbles, Gerli examined an area’s surge in housing costs during the pandemic using data from Zillow, the St. Louis Fed, and the US Census Bureau. Specifically, he looked at an area’s growth in annual house payments, calculated by combining its growth in mortgage payments and property taxes.
Using this methodology, Gerli identified the top 15 markets with the highest growth in annual costs between April 2020 to April 2022. He found that Austin, TX led the pack, with annual housing costs rising 93.5% over the last two years.
According to Gerli, this nearly doubling in growth of housing costs has far outpaced Austin’s wages and rent growth, which rose only 7% and 24% respectively over the same time period. For this reason, he believes that Austin and other cities that have experienced the highest growth in annual house payments are currently in a housing bubble.
Courtesy of Nicholas Gerli/Reventure Consulting Even more striking is that the annual house payments in these smaller cities have become equivalent to or more expensive than their larger counterparts, said Gerli, who estimated that annual house payments in Tampa, FL (ranking 7th) are now nearly as expensive as Chicago, IL. He also said that costs in Salt Lake City, UT (in 9th place) are now higher than Washington DC, while costs in Austin are more expensive than costs in the entire New York metropolitan area.
Courtesy of Nicholas Gerli/Reventure Consulting The top 15 markets identified by Gerli with the highest growth in annual costs between April 2020 and April 2022 are listed below in descending order. Following Austin in the lead, the top three cities are rounded out by Boise, ID and North Port, FL.
1. Austin, TX
RYAN KYTE/Getty Images 2020 average payment: $23,593
2022 average payment: $45,648
% increase: 93.5%
2. Boise, ID
Anna Gorin/Getty Images 2020 average payment: $18,200
2022 average payment: $33,624
% increase: 84.7%
3. North Port, FL
Jack Elka Photo/Getty Images 2020 average payment: $16,404
2022 average payment: $30,079
% increase: 83.4%
4. Cape Coral, FL
Keita Araki/EyeEm via Getty Images 2020 average payment: $14,389
2022 average payment: $26,274
% increase: 82.6%
5. Phoenix, AZ
Lightvision, LLC/Getty Images 2020 average payment: $15,954
2022 average payment: $29,117
% increase: 82.5%
6. Ogden, UT
mandicoleman.com/Getty Images 2020 average payment: $18,795
2022 average payment: $33,989
% increase: 80.8%
7. Tampa, FL
Busà Photography/Getty Images 2020 average payment: $13,301
2022 average payment: $23,539
% increase: 77.0%
8. Provo, UT
DenisTangneyJr/Getty Images 2020 average payment: $20,592
2022 average payment: $35,999
% increase: 74.8%
9. Salt Lake City, UT
Darwin Fan/Getty Images 2020 average payment: $21,985
2022 average payment: $38,211
% increase: 73.8%
10. Raleigh, NC
Raleigh, North Carolina Kevin Ruck/Shutterstock 2020 average payment: $16,567
2022 average payment: $28,733
% increase: 73.4%
11. Spokane, WA
Kai Eiselein/Getty Images 2020 average payment: $17,137
2022 average payment: $29,563
% increase: 72.5%
12. Lakeland, FL
Sean Pavone/Getty Images 2020 average payment: $11,171
2022 average payment: $19,070
% increase: 70.7%
13. Knoxville, TN
Henryk Sadura/Getty Images 2020 average payment: $11,123
2022 average payment: $18,901
% increase: 70.0%
14. San Diego, CA
San Diego, California David Toussaint/Getty Images 2020 average payment: $35,027
2022 average payment: $59,457
% increase: 69.7%
15. Charlotte, NC
Charlotte, North Carolina. Murat Taner/Getty Images 2020 average payment: $14,132
2022 average payment: $23,985
% increase: 69.7%
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