Is the Housing Market Overvalued Today?

Question

Hey Everyone!

I am actually taking one of my first real estate classes in college and every weekend we have to read multiple articles and comment on it. After several weeks of reading I found that houses prices are decreasing due to sellers decreasing their asking price. Because of this I started wondering, how accurate is this statement? Is the current housing market overvalued? What does it mean when people say that the market is correcting itself and how much big a factor due interest rates play on that?

Please help me figure out this questions. I am student looking to start investing in real estate in the future and very passionate towards the industry. Curious about this topic and looking to build my life and future on the base of real estate.

Bruce Woodruff · Answer

You'd have to define 'overvalued', but generally, yes...people have been paying ridiculous prices for almost anything for the past few years.

So basically a correction means that artificially inflated prices eventually have to come down as they have no basis in reality. [My definition only]

And of course interest rates going up will make a lot of people back off from a purchase. Even though that may not be a smart move...interest rates are still low, historically speaking. And a good deal is always a good deal, regardless of anything else - be it market conditions, interest rates or anything else...

Bill B. · Answer

Ask them to define “overvalued” you would THINK that means people are or at least have been charging more than it’s worth. But is that possible? And if it is possible why isn’t it possible anymore? I’d like to sell my used car for “over value” why won’t anyone pay it?

I would ASSUME these people at least think they are the smartest people in the room. But could they answer that question? If interest rates dropped to 1% tomorrow would house prices suddenly increase? If so, then they aren’t “over valued” today. Unless they actually mean at today’s new interest rates the new payments have made homes unaffordable to too many people. But again, unaffordable doesn’t meant overvalued. I might think Tesla model s plaids are overpriced, or unaffordable, but that doesn’t mean overvalued and it certainly doesn’t mean prices are about to drop. . Let’s pretend they are overvalued. What’s their solution? Sell and live in a car? Sell and pay rent and hope everyone else figures out they are so overvalued that you can get your selling/buying costs back and break even? Sell and move to a red state? Pick someone to marry and move in with them? Or is it just “be afraid of this thing you can’t prevent, and can’t avoid”?    .  Personally I can’t believe anyone that isn’t downsizing from a home with enough equity to buy cash, doing a 1031, moving in with someone else or at least moving across country would be selling in this interest rate environment. You could buy a $100.000 cheaper home and have your payment go up. That would be an interesting survey, why are you selling. (For owner occupied only as obviously landlords or inherited properties get sold for all kinds of reasons.) I wonder if thee are more inherited properties if the court system was locked down for 12-18 months.

Michael Wooldridge · Answer

Too early to say anything really. First time home buyers were up in the month of August actually. Which makes sense since they have been priced out of the market. The change in market has caused a lot of buyers to pause and it looks like some first time buyers are jumping in. Next 60-75 days will be telling. And Fed rates are critical.

Also this should be obvious but there is very much a massive difference in regions right now. West Coast vs East Coast are seeing very different changes in the markets thanks to rates. So where you are matters.

Michael Wooldridge · Answer

@Alejandro Valbuena very complex question. First thing I’d say is housing is absolutely location/regional specific. For example in 2008 CA, FL, Las Vegas drove massive median drops across the country. However, many areas my own for example only saw 13% shift. Not fun but hardly life changing in the grand scheme.

This is behind a pay wall but it’s showing current valuations: https://fortune.com/2022/09/20...

West Coast some parts of Texas (Austin) - mountain areas that saw huge covid work remote value increases - all trending down. East coast for most part trending up still or flat - even Florida.

So many factors influencing valuation. Reason to believe we will see a drop. But overvalued is tough when you factor in low supply (relative), lots of cash out there, and a host of other economic factors.

Regardless I’d say the first question is what area are you looking at? Nationally is only relative to a degree.

Aaron Gordy · Answer

@Alejandro Valbuena

The market hasn't shifted to a buyers market. Its shifted from where it was a few months ago when sellers could ask any price and get it. For example, last year a house in Leander (Austin suburb) received over 99 offers and was bid up by over 100k. The months of inventory was below 1 month. Nowadays the months of inventory is around 3 months in the Austin metro which still indicates a sellers market. Nowadays sellers aren't able to put lipstick on a pig and get 50 offers with many way above list price.  Sellers are dealing with a new reality. When months of inventory balloons then its time to consider it to be a buyers market.

Since you are in Miami look at the Little Haiti area. The last time I was in South Florida (last year) I almost bit on a property there and a property in northern part of Fort Lauderdale.

Jay C. · Answer

Housing market is driven:

#1 affordability

#2 sentiment

Affordability is going way down due to rapidly increasing interest rates.

Sentiment is going down due to making easy money on appreciation is lost.

Hmmmmmmm

Russell Brazil · Answer

The housing market is never overvalued.

The housing market is never undervalued.

"In an efficient market at any point in time the actual price of a security or product will be a good estimate of its intrinsic value." - Eugene Fama

Ricardo Hidalgo · Answer

I think it depends on the area. If you are landlocked, affluent area, good schools those market may not come down very much. Our area has only come down 3-6% with all these changes with low inventory remaining on the market. In addition, our markets have general wealth that come here yearly with a strong primary demand to limit a saturation of listings.

Mohammed Rahman · Answer

Hey @Alejandro Valbuena - lots of different type of info in the news media about this, but remember that panic always sells... so people are more likely to click on an article when it says HOUSING CRASH IMMINENT...

Yes I think we're headed for a much needed correction, but home prices are still up 10%+ since last year.

The Fed will keep raising rates until inflation is under control, they don't care because this is the smart thing to do in the long term - or else we'll end up paying $100 for a gallon of milk.

Anyways I speak about this in my Youtube videos that I think will be helpful for you if you end up having to write any papers in your class. You can find my videos on my site.

Paul Vail · Answer

If we look at historical context, housing is significantly over-valued.   And historically, it has corrected over time.  Folks like to think that 2009 was a one-off, yet we've had bubbles prior.  What we see now is perhaps a tipping point away from individual home ownership to institutional home ownership.   Will first-time home buyers become rarer as wages continue to fall further behind housing prices?  Will we see only the first three quintiles of earners able to afford buying in the future, with the bottom 40% relegated to a lifetime of tenancy?  Only time will tell.   Here are a few graphs to illustrate economic trends.  In the one on housing prices corrected for inflation, the red line is my approximation of an average bottom of the market.

And here's a simplistic link to do a back-of-the-napkin affordability calc on a $300k home at 7% 30-yr mortgage:

https://www.dollartimes.com/in...

Is the Housing Market Overvalued Today?

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