As home prices accelerate at an elevated rate, the old question is being asked once again: “Is there a price bubble in the housing market?"
Some interesting signals based on future expectations by market participants are appearing. Google reported last week that the search "When is the housing market going to crash?" had spiked 2,450 percent in the past month. Another question, "How much over asking price should I offer on a home 2021?" jumped 350 percent in that same week.
So far, 2006-07 housing bubble characteristics are not prevalent. Those are:
- loose lending standards,
- lax oversight, and
- exuberant speculation (investment motive).
The problem with bubbles is that they cannot be identified with any certainty or confidence. If they could be, they would never form in the first place.
Using the Case-Shiller (2003) methodology, the Federal Housing Finance Agency (FHFA) house price index is estimated based on housing market fundamentals (income per capita, population change, housing starts, employment change, unemployment, mortgage interest rates). It's then compared with the reported FHFA price index applied to Texas and the major MSAs (Austin, Dallas-Fort Worth, Houston, and San Antonio). This methodology was one of the first to point out the formation of a housing bubble in the U.S. housing market.
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. In the long run, overvalued/undervalued home prices should revert toward fundamentals, eliminating any differences between them.
The results show the difference between actual and estimated prices (based on fundamentals) continues and, in some cases like Texas and Austin, increased after the pandemic.
Texas. Difference between actual and estimated prices continued to increase and accelerated during the pandemic, indicating a possible misalignment.
United States. Difference increased at the end of 2020 and probably will continue at the start of 2021. However, fundamentals are still relatively aligned.
Austin. Difference continued to increase and accelerated during the pandemic, indicating a possible misalignment.
Dallas-Fort Worth. Difference continued to increase and accelerate during the pandemic, indicating a possible misalignment.
Houston. Difference continued to decrease, moving more in tandem with fundamentals.
San Antonio. Difference increased at the end of 2020, indicating a possible misalignment.
The expectations going forward and rising mortgage rates in 2021 combined with recent rapid price growth will slow demand and, consequently, price growth to more sustainable levels.
Identifying home price misalignments between actual and balanced prices is not easy. Determining with certainty the formation of housing bubbles is even more difficult.
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.
Note: Seasonally adjusted. Included WTI oil price and found consistent results with and without oil prices.
Source: Federal Housing Finance Agency and Texas Real Estate Research Center at Texas A&M University