Over the last two years, the median national home price has grown by 34% -- over four times the growth rate from 2018 to 2020. Many real estate markets have seen home prices increase at even higher rates during that time. Tampa, Florida, for example, has seen home prices rise by 49%, while home prices in Austin, Texas have climbed 59%. With such rapid home price growth, it's no surprise to hear that several real estate markets are overvalued and leaving homeowners and investors at risk in the event of a pullback.
Buying real estate in an overvalued market can make sense if long-term demand and lack of new housing or space for new housing is the primary factor driving price growth. But that's not the case with many overvalued markets. This is precisely why I wouldn't dare buy real estate in these three markets.
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Miami, Florida
Miami, Florida is a hot spot for tourism, international investments, and institutional investors. Its tropical climate, gorgeous beaches, proximity to other countries, vibrant nightlife, and diverse neighborhoods have made it a popular place for people to work and live for decades. But in the past two years, the city has seen a growing number of residents move in. According to Redfin, Miami was the number one city for relocation for the second quarter in a row, with the majority of residents coming from New York City.
Inward migration is a good thing -- it means there is more demand for things like housing, restaurants, retail, and other real estate properties. But Miami also faces a lot of challenges, including effects from environmental challenges like flooding that put the future of the city into question. It is also the least affordable housing market in the U.S., which makes it hard to generate a good return on investment.
Lastly, Miami's housing market is historically known for being well supplied, particularly for condos and high-end luxury housing, both of which are showing signs of slowing as mortgage rates rise. I think today's market squeeze will be short-lived, as less buying will increase supply again.
Boise, Idaho
Boise, Idaho has been in the top five fastest-growing real estate markets for several years running. It's one of the hottest, if not the hottest, real estate markets in the U.S. as people in Western cities relocate to the rapidly growing area. According to a study done by Florida Atlantic College of Business, Boise, Idaho is the most overvalued city in the United States, with estimates showing current values are as much as 72% over the expected price.
The average home price in the city is $535,000, while the average rental rate is $1,500 -- which are not great numbers if your goal is owning a rental property. There is talk of Boise housing prices reaching their peak, but I'm not so sure. There is a lot of capital being put into the market and incentives to attract wealthy individuals, and the ongoing pandemic has only motivated many from higher-tax states like California to make the move. Nonetheless, the demand it's seeing today doesn't necessarily mean it is an ideal place to invest.
Austin, Texas
Austin, Texas has quickly made a name for itself as one of the coolest new cities to call home. It's the fastest-growing city in Texas, with a nearly 21% increase in residents from 2010 to 2020. Forecasts except the greater metropolitan area surrounding Austin to reach the 3 million resident mark at the end of the next decade. Like Boise, I think the current demand for housing in Austin is substantiated. There are good job opportunities, particularly as more and more companies expand their operations or move their headquarters to the city, and an insufficient supply of housing.
But investor attention to the market, not unlike the city of Boise, has pushed prices up as people try to score a slice of what very well might be the next big U.S. city. According to Redfin, competition is fierce with a ranking of 75 out of 100, and it's the second most overvalued market according to the Florida Atlantic study, with its values as much as 67% higher than expected.
What I would buy
In the case of these three markets, I would rather put my money into a more affordable market with less competition that can generate better returns. While I won't personally buy real estate in these cities, it doesn't mean I wouldn't invest in a real estate investment trust (REIT) that invests there. In fact, buying shares in a REIT that has exposure to these markets is one of the best ways to benefit from the red-hot demand while minimizing my risk exposure.
REITs have much better margins for buying, thanks to things like massive amounts of cash, economies of scale, and lower cost of capital, which can improve returns in high-quality real estate that I personally would never be able to purchase. Overvalued markets are risky, but it doesn't mean they are hands-off.
