Same song, second verse: “Is there a bubble in the real estate market?”

Luis Torres

As house prices accelerate at an increasing rate, the old question is asked again: “Is there a price bubble in the housing market?"

Interesting signals are emerging based on future expectations of market participants. Google last week announced a search"When will the housing market collapse?" has grown by 2,450 percent in the last month. Next question, "How much above the requested price should I offer for house 2021?" in the same week it jumped 350 percent.

The characteristics of the housing bubble in 2006-07 do not yet prevail. They are:

  • free credit standards,
  • lax surveillance and
  • lush speculation (investment motive).

The problem with bubbles is that they cannot be identified with certainty and certainty. If they could, they would never form.

Using the Case-Shiller (2003) methodology, the Federal Housing Finance Agency’s (FHFA) home price index is estimated based on housing market fundamentals (per capita income, population change, housing start-up, change in employment, unemployment, mortgage rates). It is then compared to the reported FHFA price index applied to Texas and major MSAs (Austin, Dallas-Fort Worth, Houston and San Antonio). This methodology was one of the first to point to the emergence of a bubble in the US real estate market.

If real prices are higher / lower than the estimated price, then prices are rising at a higher / lower rate than explained by the fundamentals, which indicates possible problems in the housing market. In the long run, overvalued / undervalued house prices should return to fundamentals and eliminate any differences between them.

The results show that the gap between actual and estimated prices (based on fundamentals) continues and in some cases, such as Texas and Austin, has widened since the pandemic.

Texas. The gap between actual and estimated prices continued to widen and accelerate during the pandemic, indicating a possible discrepancy.

United States. The gap widened at the end of 2020 and is likely to continue in early 2021. However, the fundamentals are still relatively in line.

Austin. The difference continued to increase and accelerate during the pandemic, indicating a possible discrepancy.

Dallas-Fort Worth. The difference continued to increase and accelerate during the pandemic, indicating a possible discrepancy.

Houston. The difference continued to decline and moved more in tandem with the fundamentals.

San Antonio. The gap widened at the end of 2020, indicating a possible discrepancy.

Expectations for the future and rising mortgage rates in 2021, combined with the recent rapid rise in prices, will slow demand and, consequently, price growth to a more sustainable level.

Identifying the mismatch between house prices between actual and balanced prices is not easy. It is even more difficult to determine the emergence of housing bubbles.

There is no sure way to find out what prices “should be," even when considering the determinants of supply and demand, because they change over time.

The Texas Real Estate Research Center continues to monitor data and will issue updates as needed. …

Note: Seasonally adjusted. WTI oil price included and consistent results found with and without oil prices.

Source: Federal Housing Finance Agency and Texas Real Estate Research Center at Texas A&M University

David Berry

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