Get Ready for Another Real Estate Bubble
Life + Money

Get Ready for Another Real Estate Bubble

Real estate prices increased again in January, with several states reaching new historic highs, leading experts to wonder whether another real estate bubble might be brewing

Nationwide, home prices rose by 5.7 percent in January compared to a year ago, according to data released Tuesday by CoreLogic. 

Related: This Is the Most Overvalued Housing Market in the Country

CoreLogic also cited four states (Colorado, Texas, Wyoming and New York) where home prices have reached new historical record highs. Colorado was the state with the highest home price appreciation in January with a 9.1 percent increase, while Texas and Wyoming were shortly behind with 8.3 percent increases. New York homes rose by 5.6 percent.

“In part, these trends reflect the strength of regional economies,” Frank Nothaft, chief economist at CoreLogic, said in a press release. “Colorado and Texas have had stronger job creation and have seen 8 to 9 percent price gains over the past 12 months.” Core Logic wasn’t immediately available for comments.

A quick price gain doesn’t mean the market is overvalued, but strong demand for real estate and limited supply can certainly lead to a market being overvalued. And the more prices are overvalued, the greater the chance that a bubble might be forming.

Trulia’s Bubble Watch data, which lists home prices relative to fundamentals for the nation as a whole and for 100 U.S. metro areas, can shed light on whether the U.S. and these states might be overvalued.

In the country, home prices were still 2 percent undervalued relative to fundamentals in the fourth quarter, Trulia wrote in January. In the first quarter of 2006, at the height of the last housing bubble, home prices soared to 34 percent overvalued. 

Related: Why a Booming Job Market Hasn’t Led to a Booming Housing Market

There’s not yet a bubble in the U.S., despite factors reminiscent of the last housing bubble, including low interest rates (still below 4 percent) and somewhat lax rules on down payments for first-time buyers. But looking at specific states can give a different picture and the Trulia data points to some markets being overvalued.

All Colorado and New York markets mentioned by Trulia were still undervalued in the fourth quarter, including New York City (5 percent undervalued) and Long Island (4 percent undervalued). Wyoming wasn’t even mentioned.

What about Texas?

Some of the largest price increases, including distressed sales, occurred in the Houston/The Woodlands/Sugar Land market (10.9 percent) and in the Dallas/Plano/Irving market (9.1 percent), according to CoreLogic. 

Related: 10 Best Cities for Job Seekers

Trulia’s Bubble Watch claims that all but one market (Fort Worth) was found to be overvalued. Home prices in Austin were overvalued by 16 percent, while those in Houston, San Antonio and Dallas were overvalued by 10 percent, 7 percent and 3 percent respectively. The oil business isn’t the only industry feeding that home price appreciation in the Lone Star state. Technology has also been a large contributor, especially in Austin.

Whether the steep home price appreciation in some Texas markets will lead to a bubble will depend on whether the employment growth there is sustainable in the long term.

A continued drop in oil prices, or even a tech bubble burst, could easily curb demand for housing in hot Texas markets, and take some of the air out of the sky high prices.

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