The last housing bubble missed Texas. Now Texas has the second most overvalued housing market in the country
Back in the early 2000s, housing speculators believed that a shortage of supply would cause home prices to skyrocket at a double-digit rate. These investors, many of whom were home flippers, assumed their best bet would be in fast-growing Sunbelt cities -- and when the housing bubble ultimately burst and led to the 2008 financial crisis, places like Las Vegas and Miami took a beating.
However, only one state was not affected by the Sunbelt housing crisis: Texas.
Currently, the U.S. is experiencing another housing boom, with home prices out of reach for many buyers. US home prices have risen during the same period. This time around, however, Texas is at the forefront of the 19.8% growth over the past year, which is more than four times higher than the growth in residential income.
Statistically speaking, Florida Atlantic University identifies Austin as the second most overvalued housing market in the nation, with a median home value of $589,600. That's 66% above the $354,600 limit that the Florida Atlantic University researchers say is supported by underlying economic fundamentals. Only Boise, Idaho, was overvalued by more, at 75%.
Although home prices are soaring in Texas, it's not just Austin that is experiencing rising prices.
According to the Florida Atlantic University researchers, Dallas is "overvalued" by 46%, ranking it No. 18 in the nation. Not too far behind are San Antonio ("overvalued" by 30%) and Houston ("overvalued" by 28%). Why is this happening?
With the pandemic-induced migration of work-at-home workers, Texas has greatly benefited. Texas has attracted a large number of Californians looking for warm weather at a lower cost of living. Some Fortune 500 companies relocated their headquarters from the Golden State to the Lone Star State during the pandemic, perhaps due to Texas's favorable tax rates.
Just two years ago, Florida Atlantic University rated Austin and Dallas as only "overvalued" by 4% and 10%, respectively. The dramatic price inflation since then speaks to the unprecedented nature of the ongoing housing boom. The heated Texan markets also have more folks in the real estate industry particularly concerned about Austin.
Austin's latest reading by Florida Atlantic University, which finds that it is overvalued by 66%, places it in the same category as Phoenix (59%), Las Vegas (72%), and Miami (76%). Not exactly good company.
Florida Atlantic University researchers aren't the only ones finding the Texas housing market out of whack. The Fortune magazine recently requested a detailed analysis of U.S. housing markets from Moody's Analytics. To determine whether local income levels could support local home prices, the firm studied local income levels. What did they discover? It found that 149 of the 392 metro statistical areas measured were overvalued by at least 25%. In addition to Austin (overvalued by 41%), Dallas (33%), Houston (28%), and San Antonio (25%).
However, Moody's Analytics Chief Economist Mark Zandi says we're not living in Housing Bubble 2.0 just yet. It would take both overvaluation of home prices and speculation in the market for a market to be labeled as a housing bubble.
According to Zandi, although the market appears to be overvalued by historical standards, this is not a bubble driven by FOMO, as was the case with the housing market in the early 2000s. Furthermore, we are not in the midst of a subprime lending bonanza. Despite the fact that the Dallas Fed concludes the U.S. housing market is disconnected from economic fundamentals, the split isn't caused by shady mortgages. In the event of a price correction, the Dallas Fed says it will not be as painful as the one that occurred during the 2008 financial crisis.
Texas' ranking among the nation's most overvalued housing markets in 2022 is a stark contrast to its position during the last housing boom. Prior to the 2008 financial crisis, Texas housing markets were barely priced above fundamentals. In March 2007, home prices did not exceed 3% and 5%, respectively, of what Florida Atlantic University's model says fundamentals indicated at that time. Meanwhile, according to the Florida Atlantic University model, Austin home prices in 2007 were undervalued by 0.5%.
However, if the U.S. housing market is struck once again by a storm, I can't imagine Texas escaping so unharmed. It's not likely that the Lone Star State will be able to save itself from home affordability this time around.
I hope you have found this blog post super helpful. If there is anything else we can do for you, including helping you sell (or buy) a home, I would be honored to assist. I hope you have a great day/evening. Cheers, E + J.
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