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Are today’s boom towns at risk of going bust?

A new report from researchers at Florida Atlantic University and Florida International University examined which housing markets nationwide are most overvalued. Using third-party data, the researchers calculated the average property price in each of the 100 largest housing markets nationwide, and compare the fluctuations in prices with what would be expected based on their historic growth. Based on that comparison, they determine how over- or undervalued a market is.

As of January, the premiums homes fetched had increased in every one of the markets studied, but one market far surpassed the rest. Boise, Idaho, ranked as the most overvalued housing market nationwide, with buyers paying a roughly 76% premium for those who wished to purchase a home there.

Boise has experienced a dramatic rollercoaster ride over the past few years. Before the pandemic, it was hailed as one of the hottest housing markets in the country as it began to attract transplants from pricey West Coast markets like San Francisco and Seattle. Those buyers were attracted to the cheap home prices, stunning scenery and close proximity to those tech hubs.

But over time, Boise’s competitive advantage has ebbed as home prices surged with this bumper demand. A similar story has played out in the No. 2 most-overvalued city on the ranking, as well: Austin, Texas, where buyers are paying a 62% premium. Here are the top 10 overvalued housing markets, according to the report:

Market Premium
Boise, Idaho 76.4%
Austin, Texas 62.3%
Ogden, Utah 59.2%
Las Vegas 53.7%
Atlanta 52.3%
Provo, Utah 52.2%
Phoenix 52.0%
Spokane, Wash. 51.4%
Salt Lake City 49.7%
Detroit 48.3%

Some pricey markets have seen their fates improve recently, the researchers noted. In particular, they explain that places like San Francisco and Los Angeles were seeing “pricing crowns” develop, suggesting they were moving toward a downturn. But in most of these markets, prices have resumed their steady upward climb.

While there was no market nationwide that was undervalued based on these metric, the places where home buyers will pay the smallest premium to lock up a property are Honolulu (0.5%), Baltimore (0.7%) and New York (1.7%).

‘If you lock in a home price now, it could take years to see the return on that investment.’

— Eli Beracha, director of Hollo School of Real Estate at Florida International University

Given how overvalued the nation’s housing stock is, the researchers advised buyers to exercise caution. “We encourage buyers to negotiate aggressively or to consider renting, even in light of the recent surge in rental rates,” Eli Beracha, director of Hollo School of Real Estate at Florida International University and one of the report’s co-authors, said in the study.

“If you lock in a home price now, it could take years to see the return on that investment,” he added. “Temporarily high monthly rent could be viewed as the cost of avoiding the vagrancies of an irrationally exuberant housing market.”

The researchers pointed to Miami as an example for their argument. During the market’s peak in late 2006, buyers there paid nearly $340,000 on average to purchase a home. Only now are many of those buyers able to sell their home for a profit, they said based on their analysis.

“With the dramatic fluctuations that we’re seeing now, wealth creation through housing is not guaranteed, making homeownership a sometimes-risky investment,” Ken Johnson, an economist with Florida Atlantic University and the report’s second co-author, said in the study.

Source: This post first appeared on http://marketwatch.com/

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