What It Means to Be in an
Overvalued Housing Market

By Emily McCrary-Ruiz-Esparza
Photo by Blake Wheeler
  • US home values have finally returned to their pre-recession splendor and they’re feeling a little extra.
  • Home prices are rising faster than inflation and faster than your salary is increasing.
  • CoreLogic reported this week that nearly half of US housing markets are overvalued. We explore what this means for you.

It took a long time for the value of homes to get over the recession. For years, homes in the US failed to regain their pre-recession values, but instead remain up at night, calling over and over again the values they once had, hanging up as soon as they’d answer. But one day they got a job, cleaned up their act, and said take me back.

Finally, US home values have regained what they lost in the recession, but there’s a small problem: wage growth has stayed below 3% in the last few years, while the home prices have increased more than 5%.

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What does this mean?

Though our labor market is killing it right now and Americans are eager to get their hands on some sweet, sweet single-family homes, that demand is driving housing prices up but wages are not following suit, so it’s just harder for buyers to get the houses they want.

A Reuters poll fresh off the grill and still bleeding (May 16–June 5) showed that analysts believe the S&P/Case Shiller composite index is expected to grow an additional 5.7% this year. So what does this mean? Case-Shiller is an index that tracks the price of single-family houses nationally and in 20 metro regions (like Atlanta, Boston, Charlotte, New York, Chicago, etc.), and Reuters asked 45 analysts what they expect the index to show for the rest of the year, and they said, Eh, not good for buyers.

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It’s important to note that a different poll, also by Reuters, showed that some economists believe we’ll see an average earnings growth of 2.8% and inflation of 2.5%, with home prices rising 4.3% in 2019 and 3.6% in 2020—that’s, um, a little better. Renters are also expected to feel the burn, according to 60% analysts Reuters polled, who expect to see the cost of renting increase as well.

What is an overvalued housing market?

This week, CoreLogic reported that “An analysis of home values in the country’s 100 largest metropolitan areas based on housing stock, indicates 40% of metropolitan areas had an overvalued housing market as of April 2018.”

Overvalued means that homes in these areas are priced at least 10% higher than the long-term standard, and local incomes are not expected to support those prices. “Lower affordability means it is harder for people to get on the track of building home equity. This can have long term negative effects on wealth building,” says Mark Chin, CEO of Keller Williams Tribeca. “Since credit is loosening again (partial-doc loans are back), this could create a credit crisis as purchasers stretch beyond their comfortable limit to purchase homes. In an economic downturn, this can be disastrous (as it was in the Great Recession).”

That killer labor market has produced a lot of eager buyers and an inventory deficit, enter overvalued real estate.

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The risks of an overvalued market for sellers (and what can be done)

It’s not just buyers paying unreasonable prices who are at risk in an overvalued market. Sellers can feel too rosy about a “sellers market” and get skipped by the best buyers.

“Overvaluing your home in today’s market is a huge mistake. Because mortgage rates are increasing, some sellers automatically think that it is a sellers’ market and price high thinking that buyers are desperate to purchase now before another increase,” says Adam Taylor, Managing Director of BOND New York. “All indications are that increases will continue to be slight and will increase at a slow pace. Sellers and buyers should follow this trend at the same pace. Smart sellers are pricing to sell while savvy buyers are skipping overpriced homes altogether. My advice to sellers? Price correctly and make the sell. To buyers, I say, take the time to find the best price.”

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