With home prices increasing without the aid of imprudent money lending in many cities in the U.S., it is easy to think about investing in real estate. Nevertheless, there are some important markets that can be deemed as overpriced.
According to the National Association of Realtors, the median price of residential properties has risen 9% since last year. This means that an average home that could be bought for a little over $200,000 on April, 2014, now costs more than $219,000. While this price is under the peak price of $230,400 that was seen on 2006, Lawrence Yun, Chief Economist of the Realtors’ Association says that prices will get near that level sometime this year.
The median income isn’t growing nearly as fast as home prices are. What this means is that certain real estate markets simply aren’t sustainable. According to research made by CoreLogic, a company that specializes in the analysis of real estate trends, 7 out of the 100 most important U.S. housing markets are now overvalued. Last fall, this number was only 4.
Sam Khater, Chief Economist at CoreLogic says that this could be something to worry about. Having such increases in home prices without having a strong demand isn’t a positive sign. However, he asserted that this phenomenon could be the result of a weak offer, as there are not many new constructions taking place at the moment.
Texas has 4 of these 7 markets. Austin, Dallas, Houston, and San Antonio, which weren’t affected by the 2008 housing crisis, have real estate prices that are at their all-time highs. It’s important to note that the prices of these markets as well as their population, are driven by oil and gas. Home prices in Dallas are 15% over their peak price in 2007. Homes in Austin are 39% more expensive than what they were in pre-crisis times. CoreLogic stated that although Texas has seen this phenomenon in the past, this time it is unsustainable.
Chief Economist Khater stated that it is highly unlikely that Texas will have a real estate crash similar to the one that happened in the 80s. He asserted that current prices aren’t as overvalued as they were 35 years ago, and that this time only the real estate markets in Texas that are directly correlated to oil are seeing a spike in prices.
Texas is a flourishing economy. Wealth is being distributed with the help of top healthcare and insurance services. Besides, technological advancements have allowed for an overall affluence increase. Therefore, it isn’t expected that changes in oil prices will affect the real estate market in those cities significantly. Nevertheless, some analysts are watching Texas closely to see how a decrease in oil prices could affect the demand for real estate and the employment in that area.
Another city in which home prices are overvalued but are still below their pre-crisis peak is Charleston, South Carolina. Khater reassures that Charleston is one of the healthiest real estate markets in the U.S. with unemployment rates going down and many new homes being sold fairly quickly.
The last 2 of the 7 cities with overvalued home prices are Miami, and Washington, D.C. Both cities have real estate prices that are still under their 2007 pre-crisis peaks. Miami’s prices are being driven by foreign cash. This explains the breach between the median income and real estate prices. Washington D.C., including suburbs in Maryland and northern Virginia, are considered one of the wealthiest places in the U.S. Also, there aren’t many homes for sale which are an important factor pushing prices up.
Economist Khater states that while these markets are overvalued, they are nevertheless healthy. Unlike the housing market in 2007, easy credit isn’t available anymore. In fact, prices are going up due to low offers among a not so low (but still mediocre) demand.
Kather assures that a crash isn’t likely. Houses are overvalued, but the market is healthy. Finally, it is still important to keep a watch on these markets, particularly in Texas, where variations in oil prices could have an adverse impact on real estate prices.
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