Thursday, January 12, 2017

Severe price overvaluation haunts hot housing market, analysts warn



ORLANDO, Fla. — Homebuilders in North Texas and around the country are looking forward to at least a couple more good years for sales and construction.
But some tough times could be down the road with a possible recession and another price bubble, a housing industry economist warns.
"During the next five years, we actually go into a fairly severe cycle of overvaluation," said Mark Boud, top economist for housing analyst Metrostudy. "This will be hard to avoid.
"As mortgage rates go up, we will increase the magnitude of overvaluation," he said. "Overall, the housing market is going to become overvalued."
High home prices are already hitting Dallas-Fort Worth buyers. The median sales price of North Texas preowned homes has jumped more than 40 percent in the last few years and is at a record level.
Prices went up an additional 10 percent in 2016. Analysts warn that more large gains are on the way in D-FW in 2017 unless the supply of houses increases.
"You have a big problem," said David Berson, chief economist with Nationwide Insurance. He warns not to look for a big cooldown in North Texas home value increases this year.
Boud told builders meeting in Florida this week that the imbalance with home prices could get "ugly." He forecasts that homes nationwide will be 18 percent overvalued by 2019 or 2020.
"Right now we are undervalued and also underbuilt," Boud said. "That's the best scenario you can find."
He said housing shortages in some markets will become more intense "with a downturn at the end."
Rising mortgage rates will contribute to what Metrostudy is saying will be a "severe overvaluation" in many markets, despite only modest nationwide price appreciation during the next few years.
Metrostudy is anticipating a small gain in home starts in 2017.
"The peak of the previous cycle, we did about 2.1 million starts," Boud said. "We actually don't think we will get anywhere close to that.
"The economy is actually creating demand to create a lot more housing."
Over the next two years, Boud anticipates continued increases in mortgage rates to above 6 percent. Long-term fixed rate mortgages are just under 4.5 percent.
"Six percent, at least historically, isn't a big deal," Boud said. "We should be able to deal with that."
Boud's outlook for the years ahead includes a greater likelihood of recession. He said new programs proposed at the federal level will add to national debt and cause interest rates to rise faster.
Steve Brown/Dallas Morning News