Being crowned is usually a good thing, but it can cut either way for real estate investors, considering the implications of a new report about home prices in what a pair of academicians say are the most overvalued housing markets in the country.
Those cities are Boise, Idaho; Austin, Texas; Provo and Ogden in Utah; and Phoenix. These are areas that often appear on lists of hot real estate markets, and now the prices there appear to be crowning, say professors Ken Johnson of Florida Atlantic University and Eli Beracha of Florida International University.
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To Beracha and Johnson, a pricing crown is an indication that home values in an area may have reached the peak of the current housing cycle and are now leveling off.
The economists use Zillow and other publicly available data to analyze 25 years of monthly pricing history for single-family homes, townhouses, condos, and co-ops, and they then create an index that shows how much above or below prices are based on the long-term trend for each of those markets.
By that measure, sellers in Boise, Idaho, are asking prices that are at an 80.51% premium above that city's long-term pricing trend, followed by Austin, Texas, at 57.13%; Ogden and Provo, Utah, at 54.46% and 48.94%, respectively; and Phoenix at 48.94%. Rounding out the top 10: Spokane, Washington; Las Vegas, Detroit, Salt Lake City, and Atlanta.
Conversely, there are three cities among the country's largest 100 markets where the Florida professors' index shows homes are selling at a discount based on 25-year trends: Honolulu at -1.63%, Baltimore at -0.75%, and Virginia Beach, Virginia, at -0.17%.
Why an "inflection point" is not necessarily a signal to buy -- or sell
Johnson and Beracha also noted that prices are rising more rapidly now in some other markets -- enough to produce premiums much larger than in the last run-up of housing prices about 15 years ago -- and that they're seeing prices at what they call an "inflection point" in several areas around the country.
It may seem a long time ago in investing terms, but there was a housing bust that began in about 2008 that resulted in millions of Americans underwater in their homes, sparking a foreclosure crisis, and generally wreaking havoc as a big part of the Great Recession.
This market is much different than that one, of course, and the conventional wisdom now is arguing against a similar bust. Yet, while we're in a national housing market that's been hitting record prices month after month in a sustained rally that looks like it could go on forever, history says it won't.
And, as Professor Beracha points out, buying into an overvalued market means investors -- including in some sense anyone who owns their own home -- may have to own the place longer than planned if they want to see a significant profit.
So, should this information deter a real estate investor from buying in one of these go-go markets? Should current owners sell and get out while the getting's good? Should new money rush into those markets where the premiums against 25-year trends are lowest?
That's a very individual question. No two markets are exactly alike, nor are the people living and investing there. But information is power, and the more of it that goes into making such a real-world, personal decision, the better.
And that's what's so interesting about the kind of macro data these Florida professors produce. It's not just academic.
