Overvalued Housing Markets In America

OVERIt?s no secret that the Texas economy has been on fire in recent years. Thanks to the unconventional oil boom, last year the state?s oil output reached levels not seen since 1976. That sparked a surge in new home construction and a simultaneous run-up in housing costs in many metro areas.

Unfortunately, the local economies haven?t kept pace with housing price growth. The gross metro product for Austin grew at a 24% clip from February 2011 to the end of last year?healthy, yes, but below the 34% appreciation in home prices over that span (median sales price, March 2015: $250,000, according to CoreLogic). Houston is an even more dramatic case: while gross metro product grew by 23% from Feb. 2011 to the end of last year, housing prices shot up 43% (median price, March 2015: $223,250). With the great oil slump of 2015 causing the energy industry to hemorrhage jobs, as my colleague Chris Helman has reported, the disparity between economic growth and housing costs isn?t likely to get better in these Texas cities any time soon. But don?t call Texas a bubble state.

?The issue isn?t that their prices are in a bubble, it?s just that prices grew faster than fundamentals,? explains Stefan Hilts, a director at Fitch Rating?s U.S. RMBS group. ?That?s why we?re worried about these markets.? Housing prices in these Texas cities are unlikely to go down, as might be expected with a bubble correction, notes Hilts. Rather, price growth is likely to stagnate as the roaring economies slow. Austin metro homes (inside the Austin-Round Rock-San Marcos, TX metro) are currently overvalued by about 19%, Houston (Houston-Sugar Land-Baytown, TX) houses by 18%, according to Fitch. Those numbers land Austin (No. 1) and Houston (No. 2) the dubious honor of topping our 2015 list of America?s Most Overvalued Housing Markets.

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