Report Finds that Seven Housing Markets are Overvalued and Four are in Texas

Although home prices have continued to rise at a slow pace for most markets, they are still at normal price levels or undervalued, according to the CoreLogic Market Condition Indicators. However, Mark Liu, principal economist at CoreLogic identified that seven of the top 100 metropolitan markets—four in Texas alone—have been identified as being overvalued, an increase from four markets in October 2014.

“Because most homeowners use their income to pay for home mortgages, there is an established relationship between income levels and home prices,” Liu said. “Over time, home price growth cannot be sustained above income growth because housing would become unaffordable. Demand would decrease causing home price growth to either slow down or decline, thereby realigning with income levels.

The CoreLogic Market Condition Indicators determine whether individual markets are undervalued, at value, or overvalued, by comparing home prices against their long-run sustainable levels that are supported by local market fundamentals, such as disposable income.  The company uses 10 percent as the threshold and defines an “overvalued market” as one where the home price is greater than more than 10 percent of its sustainable level. An “undervalued market” is one in which the home price is less than 10 percent of its sustainable level.

According to CoreLogic, home prices were significantly more than 10 percent above the sustainable level during the housing bubble from 2005-2007. During the market collapse in late 2010 and early 2013, home prices dropped rapidly more than 10 percent below sustainable levels. As home prices continued to increase, the gap has narrowed to 7 percent below the sustainable level in February 2015. CoreLogic expects the gap between the company’s Home Price Index (HPI) and the sustainable level to be 3.5 percent by the end of 2017.

“If you are thinking of buying a home and have the financial means to do so, this could be a good time to take a look at the neighborhoods you are interested in,” said Dr. Frank Nothaft, SVP and chief economist at CoreLogic. “We expect home prices in our national index to be up about 5 percent in the next 12 months, and mortgage rates are also likely to increase over the next year.”

Click here to view CoreLogic's Market Condition Indicators.