homeproperty777: This real estate bubble isn’t like the last one that lasted roughly from 2008 to 2010. That one was based on loose lending standards and covered most of the country. In today’s market, we're seeing much different conditions, including tight lending standards and segmentation. In regards to the latter point, some cities are overvalued and in extreme bubble territory while other cities are undervalued and might present long-term investment opportunities.
So, which cities are overvalued and which ones are undervalued? (For related reading, see: When Is the Best Time to Buy a House?)
Overvalued Cities
Fitch Ratings recently rated overvalued and undervalued cities based on the following factors:
Local economic fundamentals
Unemployment rates
Population growth
Mortgage rates
Rental prices
Buyer demand
Inventory levels
Based on those factors, Fitch found the following cities to be overvalued and listed the percentages of how overvalued they are:
Austin, Texas 19%
Houston, Texas 18%
Phoenix 18%
Riverside, Calif. 17%
Miami, Fla. 16%
Las Vegas 14%
Dallas and Denver might not have made Fitch’s overvalued list, but they both of late have seen record-high home prices, even higher than they saw in 2006. In Dallas, the median price for a condominium is $1.13 million, and the median price for a house is $1.35 million. (For related reading, see: Looking for Alternatives to Investing in Real Estate?)
Bubble-like conditions in Texas makes sense. Home values in these cities didn’t skyrocket as much as others around the country during the subprime mortgage crisis; they were seen as somewhat of a safe haven. Prior to late 2014, demand for oil was strong, which led to a great deal of job creation, which then led to increased home buying and higher prices. Speculative investors also moved in. Now, oil prices have plunged, jobs have been lost, and home prices throughout much of Texas appear to be overvalued.
In Miami, a major bubble is forming. Even though it's not the most overvalued city on this list based on Fitch’s parameters, you have to apply logic to every situation. Luxury real estate in Miami has been on fire for years, which has been driven by Chinese, Russian, and Brazilian investors. Look at how those three economies are performing now: Not so great. It’s likely that you’re not going to see the same kind of demand for Miami's lux property that you have over the past several years. On top of that, according to RealtyTrac, 30% of Miami homeowners were underwater on their mortgages in the end of 2014.
In Las Vegas, 27.9% of homeowners were underwater on their mortgages in the second quarter of 2015.
Across the entire country, home prices are 2.7% higher—at $236,400—than they were in July 2006, according to the National Association of Realtors, but much of this is driven by too-hot markets, which include San Francisco, Seattle, and Salt Lake City.
Think about that 2.7% growth for a moment. Without any real income growth and the labor force participation rate now at a 38-year low at 62.6%, it’s not going to be possible for home prices to see a sustainable increase. At some point, in most markets, they will come back down to reality. (For related reading, see: When Is the Best Time to Sell a House?)
Undervalued Cities
The following cities don’t guarantee good investment opportunities. If hot markets tumble and deflationary forces (a different yet related topic) lead to the stock market plunging, then it’s not likely that these markets will see appreciation at any point in the near future. However, they might present long-term investment opportunities.
The primary reason for the poor real estate performance in the cities listed below is industrial declines, but a city isn't tied to a specific industry forever. If new and/or newly-hot industries see low-priced opportunities to run operations in these places, it can lead to renewed growth and an improved real estate market. The cities are followed by the percentages of how undervalued they are:
Detroit 17%
Cleveland 16%
Providence 12%
Warren, Mich. 8%
Newark, N.J. 8%
The Bottom Line
A lot of the price appreciation in hot markets has been due to investor speculation, not income growth and traditional home buying. With Chinese, Russian and Brazilian markets suffering, foreign investors will begin to shy away from these types of investments, which will lead to declining prices due to a lack of demand. This will also lead to less interest from domestic investors. You simply can’t have a sustainable real estate recovery when incomes are stagnant. Over the next few years, some markets will be punished more than others, but now doesn’t appear to be the best time to invest in real estate unless you really understand a local market and can find a great bargain. (For related reading, see: Where Are Real Estate Stocks Heading?)
Overvalued Cities
Fitch Ratings recently rated overvalued and undervalued cities based on the following factors:
Local economic fundamentals
Unemployment rates
Population growth
Mortgage rates
Rental prices
Buyer demand
Inventory levels
Based on those factors, Fitch found the following cities to be overvalued and listed the percentages of how overvalued they are:
Austin, Texas 19%
Houston, Texas 18%
Phoenix 18%
Riverside, Calif. 17%
Miami, Fla. 16%
Las Vegas 14%
Dallas and Denver might not have made Fitch’s overvalued list, but they both of late have seen record-high home prices, even higher than they saw in 2006. In Dallas, the median price for a condominium is $1.13 million, and the median price for a house is $1.35 million. (For related reading, see: Looking for Alternatives to Investing in Real Estate?)
Bubble-like conditions in Texas makes sense. Home values in these cities didn’t skyrocket as much as others around the country during the subprime mortgage crisis; they were seen as somewhat of a safe haven. Prior to late 2014, demand for oil was strong, which led to a great deal of job creation, which then led to increased home buying and higher prices. Speculative investors also moved in. Now, oil prices have plunged, jobs have been lost, and home prices throughout much of Texas appear to be overvalued.
In Miami, a major bubble is forming. Even though it's not the most overvalued city on this list based on Fitch’s parameters, you have to apply logic to every situation. Luxury real estate in Miami has been on fire for years, which has been driven by Chinese, Russian, and Brazilian investors. Look at how those three economies are performing now: Not so great. It’s likely that you’re not going to see the same kind of demand for Miami's lux property that you have over the past several years. On top of that, according to RealtyTrac, 30% of Miami homeowners were underwater on their mortgages in the end of 2014.
In Las Vegas, 27.9% of homeowners were underwater on their mortgages in the second quarter of 2015.
Across the entire country, home prices are 2.7% higher—at $236,400—than they were in July 2006, according to the National Association of Realtors, but much of this is driven by too-hot markets, which include San Francisco, Seattle, and Salt Lake City.
Think about that 2.7% growth for a moment. Without any real income growth and the labor force participation rate now at a 38-year low at 62.6%, it’s not going to be possible for home prices to see a sustainable increase. At some point, in most markets, they will come back down to reality. (For related reading, see: When Is the Best Time to Sell a House?)
Undervalued Cities
The following cities don’t guarantee good investment opportunities. If hot markets tumble and deflationary forces (a different yet related topic) lead to the stock market plunging, then it’s not likely that these markets will see appreciation at any point in the near future. However, they might present long-term investment opportunities.
The primary reason for the poor real estate performance in the cities listed below is industrial declines, but a city isn't tied to a specific industry forever. If new and/or newly-hot industries see low-priced opportunities to run operations in these places, it can lead to renewed growth and an improved real estate market. The cities are followed by the percentages of how undervalued they are:
Detroit 17%
Cleveland 16%
Providence 12%
Warren, Mich. 8%
Newark, N.J. 8%
The Bottom Line
A lot of the price appreciation in hot markets has been due to investor speculation, not income growth and traditional home buying. With Chinese, Russian and Brazilian markets suffering, foreign investors will begin to shy away from these types of investments, which will lead to declining prices due to a lack of demand. This will also lead to less interest from domestic investors. You simply can’t have a sustainable real estate recovery when incomes are stagnant. Over the next few years, some markets will be punished more than others, but now doesn’t appear to be the best time to invest in real estate unless you really understand a local market and can find a great bargain. (For related reading, see: Where Are Real Estate Stocks Heading?)
