Is there a price bubble in today’s exceptional housing market?
Luis Torres, research economist with the Texas Real Estate Research Center, discussed the topic in a post to the center’s Mixed-Use blog earlier this year.
The traits that defined the 2006-07 housing bubble are not prevalent today, he wrote. Those include looser lending standards, lax oversight, and exuberant speculation. That said, there may be a misalignment between estimated and actual prices in Texas markets.
Torres cited the Case-Shiller methodology, one of the first to point out the formation of a housing bubble in the U.S. housing market. The methodology compares the Federal Housing Finance Agency’s estimated housing price index to the actual price index FHFA applied to Texas and its major metros.
“If actual prices are higher/lower than the estimated price, then prices are growing at a higher/lower rate than what is explained by fundamentals, indicating possible issues in the housing market,” Torres wrote. “In the long run, overvalued/undervalued home prices should revert toward fundamentals, eliminating any differences between them.”
Price differences continued to increase and accelerated during the pandemic in Texas, Austin, and Dallas-Fort Worth, indicating a possible misalignment. Price differences increased in San Antonio toward the end of 2020, suggesting the same thing. Meanwhile, Houston’s difference continued to decrease, moving more in tandem with fundamentals.
Torres wrote that rising mortgage rates and rapid price increases should slow demand and bring price growth to more sustainable levels.
“There is no sure way of knowing what prices ‘should be,’ even when considering supply and demand determinants, since they change over time. The Texas Real Estate Research Center continues to monitor the data and will issue updates as necessary.”
I’m glad to see that most appraisers are doing the work to ensure prices are fair for all parties. I’ve seen appraisal values come in lower than contract prices, and appraisers calling out items of concern with the home that have sometime been passed over. I hope this provides checks-n-balances for our business and our clients.
you just do not know!!
Mr. Torres is right on the money. I believe looser lending standards, lax oversight and exuberant speculation caused collapse of housing markets in 2006-2007 along with unsustainable greed on Wall Street.
We have buyers who showing up with big down payments, solid incomes and very good credit ratings so we are much far away from the so called “bubble” because there’s lots money in play both from creditors and borrowers.
Basically, what you are saying is that you really don’t have a clue! Fundamentally, real estate prices do not follow the fundamentals; the fundamentals follow the market value that is driven by supply and demand.
So he told us nothing.
I think the question is less “are we in a bubble” (because we obviously are in most markets) and more of a question of “how do we want to define bubble”? While its not the same bubble as the one 15 yrs ago, I think anyone with a clue and without an agenda will agree its not sustainable, and that might be the most generally accepted definition of a bubble.
No one in their right mind is flat out calling for housing bubble or not. They just don’t know, can’t predict the future. If the jobs are coming to Austin, increasing housing needs, the housing market will drive up for example, bubble or not. Listen to these research or analyst often too late for us in the field. Wherever you’re at, look for sign of job growth, inflation, new schools, new construction, etc.
Bubbles are sneaky. Most people do not see them coming IF they really exist… others try to take advantage of fast moving markets like the ones we see in Texas with speculative buying. But this article IS informative and gives Agents info that we can use when folks ask their AGENT “if we are in a bubble”. I do not see enough speculative buying yet that could undermine the current market. Now there may be other unforeseen circumstances or factors in the economy that could wreck everything… WHO KNOWS??? Good Article!!! Thanks.
Informative
The question is will their be a correction? Not, are we in a bubble? Of course we are in a bubble. If the economy slows, so will real estate. If the economy crashes so will real estate. We know price growth rates have to slow but not necessarily reverse course. What is the next possible “black swan”? War, pandemic, financial fraud, trade policy, climate, whom can say if or when?
Talk to almost any housing expert and they will likely say the housing market is not in a bubble. This is despite that home prices are soaring at historical highs across the country.