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posted on 04 July 2015

Most US Housing Market Conditions At Sustainable Levels. Seven Top Markets Overvalued, Four In Texas Alone.

by CoreLogic

-- this article authored by Mark Liu

Home prices have continued to rise, though for most markets, at a slower pace. Most markets are still at normal price levels or undervalued, according to the CoreLogic Market Condition Indicators. However, seven of the top 100 metropolitan markets - four in Texas alone - have been identified as being overvalued, up from four markets in October 2014.

CoreLogic Market Condition Indicators evaluate whether individual markets are undervalued, at value, or overvalued, by comparing home prices against their long-run sustainable levels that can be supported by local market fundamentals, such as disposable income. Because most homeowners use their income to pay for home mortgages, there is an established relationship between income levels and home prices. Over time, home price growth cannot be sustained above income growth because housing would become unaffordable. Demand would decrease causing home price growth to either slow down or decline, thereby realigning with income levels. In each market, we calculate the gap between actual or forecasted home prices and their long-run sustainable levels. Using 10 percent as the threshold, we define an "overvalued market" as one in which the home price is more than 10 percent of its long-run sustainable level. Similarly, an "undervalued market" is one in which the home price is less than 10 percent of its sustainable level.

Taking a look at national home prices using this reference point, Figure 1 shows the population-weighted average of the gaps between home prices and their long-run sustainable levels in the largest 100 markets. During the housing bubble from 2005-2007, home prices were significantly more than 10 percent above the long-run sustainable levels. During the market collapse, home prices quickly fell more than 10 percent below sustainable levels during late 2010 and early 2013. Subsequently, as home prices have continued to rise, the gap has narrowed to 7 percent below the long-run sustainable level in February 2015. By the end of 2017, the gap between the CoreLogic Home Price Index (HPI) and the sustainable level is forecasted to be 3.5 percent.

Table 1 shows the seven overvalued markets of the top 100 metropolitan areas. On the list are all four large metro areas in Texas - Austin, Houston, Dallas and San Antonio - where an oil and gas boom has fueled job growth and population growth, pushing home prices well above their sustainable levels. Home prices in these four markets are also well above their historical peak levels: 26.9 percent for Austin, 18.3 percent for Houston, 14.8 percent for Dallas and 8.4 percent for San Antonio. Of the other three overvalued metros, Miami and Washington, D.C. were on the list in October 2014 and Charleston, S.C., is a new addition. As home prices rose significantly since 2013, homes have become less affordable, and therefore, home prices less sustainable.

Overall, despite significant home price growth since 2012, most markets are still well within sustainable levels, with many still recovering from the market collapse.

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