While traveling in New Jersey last year, Sean P. Salter saw the question screaming from the cover of New York Magazine: “Will the Bubble Burst?” The booming success of the housing market has defied the gravity of an economic downturn in recent years, sparking economists and others to ask whether these good times will go out with a bang. Salter, an assistant professor of finance at the University of Southern Mississippi, was intrigued.

“I picked up the magazine and read it on the plane on the way back. I was just interested that there was a whole edition of any magazine that was designated to the housing bubble,” he said.

Salter then teamed with Randy I. Anderson, associate professor of economics and finance at the City University of New York’s Baruch College, and Zheng Wang, a statistics and computer science professor at Baruch College, and the three of them set out together to find some answers to the bubble question.

“This (research) is unique in the fact that we are not really interested in the causes of housing bubbles. Our focus is: Is there a bubble or not? If I know there’s a bubble, then I know how to act accordingly, regardless of the cause,” Salter said. It’s likely that there are very localized factors that play into housing market trends, he added, and the research allows that “each (metropolitan area) may have different factors that drive it. Often the factors that drive a housing market are very different from one area to the next. We don’t want to force a statistical model on (an area).”

The researchers produced a working paper that focuses on data collected from 11 metropolitan areas. They presented the paper during an April meeting of the American Real Estate Society, a group of real estate educators, researchers and other professionals.

The researchers didn’t require a bubble to burst in order to be considered a bubble.

“We don’t define whether the bubble has to burst or not. It doesn’t have to pop and the bottom fall out of it–traditionally that’s the definition. We’ve left it open-ended,” Salter said.

“The data we have right now shows that we’re still in the midst of it,” he added.

The data at this point is limited to some major West Coast cities, and only a broader study will be able to define any national bubble trends.

Mortgage interest rates are the single most important contributor to housing bubbles, Salter said, though the research team studied a range of data, including employment, population, income, prices of single-family homes, home ownership rates, ownership housing vacancy rates, rental housing vacancy rates, occupancy rates, gross metropolitan product and rent rates, and the rate of home-price appreciation, among others.

When housing price appreciation rates in a metropolitan area were above the expected appreciation rate, those areas were considered to be in a “bubble,” while lower-than-expected appreciation rates were considered to be in a “negative bubble” or “reverse bubble” phase. The study period was January 1980 through December 2003.

Researchers selected the metropolitan study areas based on the availability of data for those areas, and they are planning to expand their project to encompass other areas across the country. The original metropolitan study areas included Los Angeles, Oakland, Sacramento, San Diego, San Francisco, San Jose and Orange County, Calif., Denver, Colo., Phoenix, Ariz., Portland, Ore., and Seattle, Wash.

Of that original group, all but three of the metropolitan areas studied exhibited bubble behavior, researchers concluded in the working paper. Seattle is experiencing a reverse bubble, while San Francisco and San Jose are “statistically ‘on target’ with respect to house price appreciation,” the paper concluded.

The housing bubble issue is very topical, Salter said, with a lot of media and public attention, and the working paper was well received at the recent real estate conference. He said his research team is planning to move forward with additional research this summer.

“Certainly the population at large would be interested in the results of the study,” he said.

Send tips, feedback or a letter to the editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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