Houston has the most overvalued housing market in the U.S., according to a report by Bank of America Merrill Lynch. The bank found that the U.S. housing on average is 13 percent overvalued compared with personal income growth, a fundamental driver of property values, and that Houston properties are 77 percent overvalued.
“We find that national home prices are marginally overvalued,” Michelle Meyer, an economist at Bank of America, said in the report. “National home prices have increased 24 percent since the trough and the most recent data for December suggest 2014 ended with prices up 4.6 percent.”
Houston is the most overvalued housing market according to Bank of America’s measurements, which compare home prices with income growth. The fracking boom helped to drive the region’s economy, but a more than 50 percent drop in oil prices since last summer has clouded the outlook.
“Although the regional economy has been reasonably healthy, price appreciation has outpaced that of local area income,” Meyer said. “The plunge in oil prices leaves the housing market in Houston vulnerable.”
U.S. home prices peaked in 2006 as low interest rates and looser credit standards boosted demand. The subsequent collapse in property values was a major cause of the 2008 financial crisis that required a taxpayer-funded bailout of banks and car makers. National housing prices have rebounded since the crisis, especially with the recovery of areas that were most distressed. The bank forecast home prices will rise 4 percent in 2015, almost matching the growth in disposable income per person.
“The improvement was driven by those markets with the steepest drop, such as Las Vegas, Phoenix and Los Angeles,” Meyer said. “The gain in home price appreciation has since slowed in these regions as the markets move further away from the crisis period and are less influenced by distressed activity. This means that we should once again focus on the fundamental drivers of home prices: income growth and overall affordability.”
Ranking for the 10 most overvalued housing markets are as followed:
1 - Houston 77%
2 - Miami 43%
3 - Washington, D.C. 27%
4 - Portland 25%
5 - Tampa 23%
6 - Phoenix 20%
7 - Dallas 20%
8 - Denver 18%
9 - Minneapolis 17%
10 - Los Angeles 16%