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CoreLogic: Overvalued metros are a warning sign

CoreLogic recently tagged nearly half the top 50 U.S. housing markets as overpriced, and that should serve as a caution signal that the market is becoming much less affordable, the company’s chief economist told Scotsman Guide News.

“When I look at our metrics for overvalued markets, to me, it is a warning sign,” said Frank Nothaft, during a phone interview on Thursday. “Maybe it is a flashing amber light that says ‘watch out.’”

nothaftOvervalued metros — markets where the home prices are now at least 10 percent higher than historical levels deemed sustainable — are candidates to see prices begin to stagnate and lower sales activity.

As of late August, home prices in 46 percent of the top 50 U.S. metros, and 34 of the top 100 cities, were deemed overvalued, according to CoreLogic. Many of these are the usual suspects along the coasts — such as the fast-growing Seattle area and numerous cities in California. Prices are also deemed overpriced in pockets of the interior U.S., in places like Grand Junction, Colorado; and Boise, Idaho.

“I worry about affordability, especially in a rising interest-rate environment,” Nothaft said. Overall affordability in the U.S. market took a significant hit over the last year through August. Interest rates have jumped up a half a percentage point, along with a 6 percent annual gain in home prices. That combination, Nothaft said, has raised the typical mortgage payment by about 13 percent.

“There are very few families that saw a 13 percent increase in their income over that 12-month period,” he said. If prices and mortgage rates rise at the same pace for another year, he said, the pressures on affordability could begin to grind down some markets.

“If mortgage rates should go up half a percentage point, or maybe a percentage point, or maybe even more, over the course of the next 18 to 24 months, with the rise in prices that has already occurred, affordability is going to really be a huge issue in those markets,” Nothaft said. “In those really hot markets, if they have been experiencing 7 percent or 8 percent appreciation over the last year or two years, don’t expect that to continue. I would expect to see a sharp slowing.”

Nothaft said the current market conditions aren’t like those of the last housing bubble, however. That market, which peaked in 2006 and then crashed two years later, was fueled by subprime lending and real estate speculation. He noted that there were significant vacancy rates in the rental market, and much higher percentages of vacant single-family properties, many of which were held by investors. Those conditions don't exist today.

Home prices have been driven up by heavy buyer demand and tight for-sale inventories. The tight inventories also have sustained the price growth in metros that are overvalued. Nothaft said that it would likely take a sharp increase in mortgage rates or a recession to shock the market and cause a general downturn. 

“At the moment, the economy is chugging along slowly, but it is chugging along at about 2 to 2.5 percent economic growth,” Nothaft said. “I am not forecasting a recession, but that is something that would derail the housing recovery.” 


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