Last week UBS came out with their annual Global Real Estate Bubble Index (there is a link on that page for downloading the entire report), which evaluates the risk of a housing bubble in 20 global financial centers. Not only did the Chicago real estate market come out with the lowest risk but it also came out as the only world city identified as undervalued.
As UBS explains they are looking for...
...recurring patterns of property market excesses...in the historical data. Typical signs include a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns.
For each city they come up with an index based upon a weighted average of indices for 5 metrics:
- Price to income ratio
- Price to rent ratio
- Prices in the city relative to the rest of the country
- Change in the mortgage to GDP ratio
- Change in the construction to GDP ratio
UBS actually provides graphs of these metrics for Chicago going back to 1981. What apparently pulls down the Chicago index are the first three on the list shown in the first graph below.
Once UBS determines the composite index values they color code the cities into 4 categories based upon the composite values:
- <-1.5 depressed
- -1.5 to -0.5 undervalued
- -0.5 to 0.5 fairly valued
- 0.5 to 1.5 overvalued
- >1.5 bubble risk
No city got put in the depressed category but with a score of -0.66 Chicago was the only global financial center in the undervalued category - and this is at least the third year in a row. Here is the complete breakdown of all the world cities.
Note that San Francisco and Los Angeles are both indicated as overvalued markets - just an FYI so you have another thing to be thankful for about not living in California.
This result is totally consistent with what we know about Chicago's home prices from the Case Shiller home price index data. Chicago has been lagging the rest of the nation in home price appreciation for quite some time. And UBS expects the Chicago real estate market to continue lagging behind the nation for several quarters to come.
UBS also provides the bubble index for all the US cities going back to 1981. You can see that Chicago really pulled away from the pack starting around 2010 and has been undervalued ever since. Note that it appears that UBS has the color legend on the right mixed up. Yellow should actually correspond to undervalued, not overvalued
Now, as I pointed out the other day, I just hope Amazon is paying attention and sees how Chicago's real estate market would benefit their employees.
#ChicagoHomePrices #HousingBubble #BubbleIndex #ChicagoRealEstate
Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.