Christian Living

Do You Live In An Over Valued Real Estate Market?

by Carlton Pruitt 
12/29/15
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Millions of homeowners got burned in the last real estate bubble beginning around 2001 and ending 2006.

Were you one of them?

Housing prices dropped as much as 60% in a 6-7 year period from 2006-2012.  Ouch!

With blisters still in their hands there are many fearful would be home buyers that have been sitting on the side lines waiting for things to cool off before jumping back into what could be another heated market.

Millions have already jumped back into the market and bought overpriced houses that will actually depreciate in the coming years.  When exactly is a moot point but when or if interest rates head higher and jobs continue to be lost then people with no income will not be able to afford a median priced home.

What's the solution?  Rent or move in with family or friends until housing prices drop and/or your income stabilizes or increases.  There's no easy answeres here.  The Federal government has created a bubble in stocks, bonds, automobiles and in housing in certain markets.

In 2012 parts of California housing prices pulled back and stabilized making for attractive speculation among several hedge fund buyers who bought up low priced homes after they pulled back from their inflated prices.  In addition many cash buyers from overseas (especially the Chinese) came into the U. S. housing markets and bid up prices and this has kept housing prices higher than most people can afford.

Three years later real estate prices are up over 50% or more in some areas.

Is now the time to sell?

 Not if you need a place to live and are settling down for the long haul but what about those wishing to buy but who still can't afford it?  

Inflated housing prices are pinching consumer budgets with many mortgages costing 50% of net income.  Historically consumers have found it affordable spending 24%-30% of their net income on housing whether rent or a mortgage but now with incomes dropping and housing so expensive there are millions who are finding their spending needs trimming.  However, too many people have been conditioned to borrow money using credit cards and other enticing schemes designed to keep almost everything priced higher than a properly designed metric.

Living within your means and saving money would be the wise thing to do.

It's easy to say just save your money but where do you put it?  Banks pay practically nothing by way of interest on your deposit.

The stock market is in a bubble and so are bonds.  Real estate is more stable and does offer a place to lay your head while building equity over the life of your loan.

One factor that has kept real estate prices so high is a lack of supply and low interest rates. If interest rates start to push higher we could see a further pull back in housing prices.  Cash buyers from overseas have also pushed up housing prices but if these cash buyers leave the market who will step in to kept prices propped up?  Mr. would-be-homeowner is already struggling to make ends meet with job lay offs and credit challenges and lower than adequate income to meet mortgage lending requirements.

Whenever there is a disparity in personal income and mortgage payments something has to give.  Most people's incomes are not keeping up with the cost of housing so it would appear that housing prices will eventually drop back into a more affordable comfort zone.

Now let's look across the nation and see if you might live in an overvalued real estate area.  If so, you might consider selling now especially if you have plans on possibly moving to another area.  This way you can get hopefully get some nice price appreciation or top dollar while sitting it out for a few years to see if prices come back down.  

If you must have your home now then moving from an expensive housing market to an affordable housing area would make sense.

 The reason most people don’t see it is because real estate isn’t in a traditional bubble where prices are at extreme levels across the board. Instead, we have a much different and more unique situation, where some pockets of real estate are undervalued yet others are even more overvalued than they were just prior to the subprime mortgage crisis.

Check your city and see if you live in near or in any of these areas.  If so you might want to sell now and capture some captial gains.  What goes up usually comes back down.

Top 10 Overvalued Markets

You probably want to know which markets are the most overvalued so you know if you're in a danger zone. The information below is based on research conducted by CoreLogic — a company that provides financial, property and consumer information, analytics and business intelligence. According to CoreLogic, the 10 most overvalued U.S. markets in the first half of the year are listed here, along with their percentages above affordability level, which is based on housing values versus local per capita income.

1. Austin, Texas: 42.3%

2. Houston: 25.4%

3. Charleston, S.C.: 23.4%

4. Miami: 20.6%

5. Washington, D.C.: 19%

6. Knoxville, Tenn.: 12.3%

7. Philadelphia: 14.3%

8. Dallas: 14%

9. San Antonio: 12.4%

10. Nashville, Tenn.: 12.3%

As you can see, Texas is a common theme, and with the energy sector — much of which is based in Texas — likely to suffer more due to deflationary trends, the divergence between housing prices and income isn’t likely to improve at any point in the near future. The only possible outcome is that home prices will eventually come back down to realistic levels once all-cash investors flee the scene. It should also be noted that commercial real estate is now priced 13% higher than pre-crisis levels.