Don’t Believe the Housing Bubble Rumors — Unless You’re in These 7 Markets


Across the nation, rising home prices suggest a definite recovery from the 2008 recession — and there’s no doubt you’ve come across more than a few articles speculating on an impending real estate bubble.

But are we really in store for a collapse of the housing market? Only in certain parts of the country, says a new study conducted by real estate experts Norm Miller, Hahn Chair of Real Estate Finance in the School of Business Administration’s Burnham-Moores Center for Real Estate at the University of San Diego (USD), Michael Sklarz, president of Collateral Analytics and Jim Follain, senior vice president for research and development at Collateral Analytics.

Pooling new research from almost 400,000 neighborhoods and 20,000 surrounding zip codes across the country, Miller and his co-authors detail their findings in a white paper called, “Is a New Home Price Bubble Forming?” In the study, they focus on defining the characteristics of a “bubble” and finding economically sound ways of evaluating the intrinsic value of homes so as to take a more accurate look at where we are in terms of market sustainability.

Related: How to Profit From a Hot Real Estate Market (Even if it’s a Bubble)

Their findings uncover strong correlations between an area’s industry and its real estate market’s volatility. “In markets where wealth is volatile, say for markets with a heavy concentration of recently successful tech start-ups, changes in the value of these companies could also be considered a volatile factor driving prices,” states the research paper. “Changes in incomes, on the other hand, rarely change rapidly and are less likely to trigger rapid price declines except in markets with little industrial diversification.”

What Does This Mean for Specific Markets?

Miller cautions against the abounding use of “bubble” when describing the U.S. real estate market as a whole. True real estate bubbles, he adds, are more rare than may be commonly believed:

“[A] reason why we do not use the term ‘price bubble’ freely is that real ones are very infrequent. Examples of real bubbles include, stock prices in 1929, 1987, and NASDAQ stocks in 2000, gold and silver in 1980, Japanese land and real estate prices in 1989-90, and, of course, home prices in the U.S. in 2005- 2007. Based on these rare examples, it is reasonable to say that true bubbles only occur on average once in a generation.”

Still, several specific markets may have reached levels of unsustainability. Factors that drive this volatility include neighborhoods with low equity and high loan to value ratios, median household income, the value of the U.S. dollar against foreign currency, demand for coastal housing with limited supply and dependence on low interest rates.

The study cites the following areas as at risk for near-bubble levels, in part due to reliance on tech capital and rapidly changing valuations of startup industry:

  • Miami, FL
  • Denver, CO
  • Portland, OR
  • San Diego, CA
  • Oakland/Berkeley, CA
  • San Francisco, CA
  • San Rafael, CA

U.S. Housing as a Whole Remains Sustainable

Miller and his team focused specifically on the neighborhood level, he says, because when markets collapse, they tend not to do so evenly across metro areas. Rather, looking at localized areas is key to getting accurate housing data.

Related: Are We in a Real Estate Bubble? An Investor’s Analysis of Current Market Trends

And while some specific areas are inflated (and this could be seen as more of a “tech bubble” than a “real estate” bubble, where declines will likely be driven by falling stock prices), the U.S. as a whole is not on the precipice of a burst real estate bubble, Miller says.

“Our analysis based on a number of approaches we have used over the years to identify home price bubbles is that we are far from bubble territory on a national or metropolitan level and that anyone claiming otherwise is looking to sensationalize an issue which does not exist.”

What do YOU think about this study? What are you seeing in your local market?

Leave a comment, and let’s talk!

About Author

Allison Leung

A career writer, editor and blogger, Allison serves as the Lead Editor and Community Manager for In the past, she has channeled her passion and curiosity for all things real estate into her jobs by working in real estate law and heading a blog about real estate market trends. Don’t ask about her dog, Ace, unless you want to see approximately 500 photos of his (adorable) face.


        • Joseph M.

          I read a recent L.A times article about how properties are receiving a crazy amount of offers and getting bid up 100k over asking price. Especially in areas in the San Gabriel Valley it seems that there is stiff competition from Asian investors with cash. I’m sure it’s great if you are selling and looking at a huge gain in equity …but not too great if you are looking to buy a house to live in. It’s pretty crazy to think that modest homes in what were once affordable areas are now going for over $1.2 million…and in L.A the houses in ‘ghetto areas’ are $400k+ .

    • Christopher Moran

      There is a table in the research paper that shows Los Angeles as overvalued by 17%, according to their model. To make it into the Top 7 most over-valued areas, an area needed to be over-valued by 20%, only 3% more than Los Angeles. Los Angeles would have made the list, if the title was “Don’t Believe The Housing Bubble Rumors – Unless You’re In These 10 Markets”, instead of stopping the list at 7.

      • Allison Leung

        Christopher: Exactly. I only included 7 because there were 7 highlighted in red on the chart – with residuals in 2015:q1 being “substantial” or greater than 20 percent. I took this to be what Miller was referring to when he mentioned areas “exhibiting frothy behavior.” 🙂

        • Christopher Moran

          Absolutely. 😉

          I think their 20% cutoff is too precise, in a field that doesn’t lend itself to that kind of precision.

          I think the key message of the study is, be more cautious if you own in any zip code with a positive residual (over-valued). The higher the positive residual number is in your area, the more alert you need to be, and the better the deal needs to be.

          If you own in such zip codes, have a backup Plan B which does not include, “hope the market keeps appreciating more”. In other words, be prepared to rent out and hold onto the property for a long time, or to unload very quickly at a discount.

    • Michael Jones

      I live in Portland. It’s been crazy here with exponential growth for the past 3+ years. Definitely unsustainable to continue at this rate. Bidding wars in prime areas are happening. Low inventory, sub 2 months.
      However, from a pro growth standpoint, we have record levels of migration here, a booming foodie industry, beer and wine industry…all areas that don’t command high wages but somehow is sustaining itself. Major builders have come here and have built and are building big apartments close in. They’re in for the long term.

      In my opinion, given a continued economy as it is with no major world issues, Portland will have a softening and mostly maintain values but will have lower percentage growth. From a west coast view, we’re the last major metro to grow. We’ve been small and cheap up until the last few years. The city is attractive to people from all over the country and I see it continuing in this fashion just not at the rates it has been over the past few years. At lease I hope this is how it goes.

      From a negative view, the city of Portland is a pain to deal with. Building permits are expensive and the city is only so happy to be a thorn in your side. Some for good reason as they don’t want to see shotty or eyesore buildings but also, the city is quite smug about sticking it to builders and rehabbers.

  1. John Barnette

    San francisco Realtor and investor here. Yes it is absolutely true the market is “crazy”. However much I believe is due to severe lack of inventory. 90% of listings receive multiple offers from over asking to way way way over asking. The actual city of SF is also very restricted in new inventory formation from water on 3 sides, city/state owned parkland hills to the south. Things will absolutely slow with less job formation and any kind of ensuing exodus of population. However we do nor have the make believe dynamics of 2005-2007 and should be able to ride out any correction. Plus after the massive run up in prices the last 3 years…I believe any distressed asset “sale” would be met with more than enough investor demand.
    We are due for a leveling or correction, but I don’t think we will be in for another ~30% slide.
    Time will tell…..

    • Bill S.

      Portland has an artificial constraint called the “urban growth boundary” Its not administered by the state of Oregon or the city of Portland its a government agency unto itself called Metro. It limits the amount of buildable land in multiple counties. If land values get too out of whack they just open or close some areas. Problem solved no more bubble.

  2. Hattie Dizmond

    This list and the corresponding data support a previous article regarding why Texas has been, essentially, immune to any “bubble” phenomenon. Taking a look at the list, with the exception of Portland, all of these areas are beset by organic restrictions on development. i.e. Mountains, oceans, deserts, swamps, etc. that create organic, geographic barriers to large scale development that would add additional inventory. Texas…not so much! The one thing we have plenty of is space. The DFW area is suffering from a severe inventory shortage, primarily due to the lack of development that occurred from 2005 – 2012. New home builds haven’t caught up with the demand created as the economy continued to grow over that time. Thanks for the great article. Hopefully, I can point people who suggest Dallas is getting ready for a bubble to this data!

    • Allison Leung

      Hi Hattie:

      Thanks so much for your comment. I thought it was fascinating how much geography and the inability of a city to expand due to oceans, etc. affects the local market — it’s not necessarily something we always think about. It will be interesting to see how Texas continues to expand!

    • Chris Newman

      Seattle’s the new Portland, as the suburbanization of the California proceeds up the region. A lot of the growth demand is from outside tech companies because the housing market is relatively cheap. So, it makes sense for them to open local branches and be able to pay a little less in salaries, and still ensure a nice quality of life for the team members. West Seattle, with old homes and stunning views, is the hot new target market for San Francisco immigrants.

      We’re a few years from hitting a(nother) price bubble in Seattle. The hot new region, the New Bellevue, is Southern Snohomish County. Especially with the coming new high density mixed-use developments (up from 15 units/acre to 58/acre) along Hwy 99 between Everett and Lynnwood, with commercial land market prices a tiny fraction of the filling region 30 minutes south.

      Lots of low-hanging fruit of many kinds here in SnoCo, at least for a few years more.

  3. Jill Patton

    I agree that Miami is headed toward a bubble, but not for the reason stated in the article.

    Foreign buyers dominate the Miami market with their all-cash purchases, specifically the high-end condo market. And, the dollar is gaining strength so many of the foreign buyers are increasingly unable to buy as much with their money. So, they are looking at other markets as an alternative.

    And, large residential REITs are scaling back their purchases – given that their stock prices have remained steady or are lower than the IPO price. And, their buying over the last couple of years pushed prices up.

    And, last, with interest rates expected to increase, that will lower the buying power for local residents.

    So, given all three factors, I think prices could fall in the Miami market in the near term.

  4. Kevin H.

    I live in the Denver area, and I definitely think that this area is getting bubbly at the moment. A lot of people don’t seem to believe that this is the case, but I suppose it usually goes that way during the growth of most bubbles.

    But, in my neighborhood alone recent home sales prices are going for 50-75% more than they did just a year ago. Whether we like it or not, that spells trouble in my mind. Wages aren’t climbing anywhere close to that rate in this area, and while new people are certainly moving to Denver at the moment, I can’t feel that my home has sustainably gone up in value some 50%+ in the past 6 months.

  5. Deanna Opgenort

    Three of the areas listed (San Rafael, Berkeley/Oakland, and San Francisco are all in the same general area (if SF goes crazy it affect everything nearby).
    Article forgets to mention the US Real Estate bubble in ’89/90, so CA real estate has every 20 years, not “once every generation” (there was also a crazy rise in mid-90’s in high-end real estate that was driven by speculation).

  6. Colin Smith

    Colorado Springs is just an hour south of Denver and we are even starting to feels some of its effects down here. Buyers are so frustrated not being to buy in Denver they are considering the long commute just to become homeowners. I know that market isn’t sustainable, however, I don’t necessarily see a bubble pop up there, more of a slow deflation as thing balance out a bit.

    • Christopher Moran

      The interesting thing about Denver, is that unlike many of the other over-valued cities, Denver does not have the geographical constraints on expansion… like an ocean. So, eventually, I would expect new construction to catch-up to demand.

      I also wonder if marijuana legalization is influencing net immigration into Colorado. I am in Pueblo, and some prospective tenants have said they moved here specifically because of that. In fact, I am renting to a couple now that uses marijuana. They have a 750+ FICO score and good jobs.

      Anyway, I have looked at properties in Colorado Springs and Denver, and I feel much safer with properties in Pueblo. Pueblo real estate doesn’t appreciate much, but it didn’t crash much either. Just nicely increasing cash flow.

      • Matt R.

        I had a place in Pueblo as I folllwed my buddy who has a few. And yes, at least half my applicants were relocating out of staters who were looking to medicate in peace. They were much better qualified than the locals. I sold that place but Pueblo has the CF numbers as good as any midwest city. One advantage is much lower taxes vs mid west. Like a couple months rent lower. I know they say that is averaged out but when I compared it was not.

        • Lia Martinez

          Katie- I live in Denver and allow my tenants to smoke marijuana and grow within their legal limits. However, I am very specific that all smoking, both tobacco and marijuana, must be smoked outside of the house.

  7. Katie Rogers

    I have a question about the area covered by a particular market. For example, Santa Barbara, CA did not make the list. Is that because the study is looking at county-wide data. If we look at only the city, I believe it would easily surpass the 20% mark.

  8. John Hamilton

    This is my thought on the matter:

    I believe that we are on the up-swing from the 2008-2009 crash. I think the correction is still happening and it may get ugly until it settles down. Too many factors can have an affect, but not like it was back then. Some areas may be susceptible for another bubble, but I think it will stay localized.

    Inventory is low because banks are still holding onto these assets hoping one day prices will catapult back to the “good ole days”. Fat chance. I think this was also compounded by a new breed of real estate investors that had no clue gumming up the works. Especially in the FSBO or distressed market.

    I think it may take a couple of years to get momentum to start the bubble in the res housing market altogether.

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