Where is US real estate most overvalued?

Where is US real estate most overvalued?

As followers of the News section on the BRIC website know, the US real market estate is experiencing sharp price rises and a chronic lack of supply. This situation has created a market entirely in favour of sellers and frustrated many would-be homebuyers’ aspirations. 

With the market at its hottest for years, analysts are beginning to ask when the cycle will peak. A recent report suggests that US real estate is arriving at the top end of the current cycle and, as a result, recommends renting rather than buying

Most overvalued market

The report, published by professors at Florida Atlantic University and Florida International University, looks at the 100 largest metros in the US and analyses their real estate markets.

Boise in Idaho stands at the top of the table for the most heated US real estate markets. According to the report, properties in this metro currently sell for over 80% more than their previous price history

Reasons behind the unprecedented demand for real estate in Boise could lie in the metro’s appeal to buyers from more expensive areas. Work-from-home buyers are moving away from the priciest metros in the US to locations such as Boise where they can buy more for their money. 

Other US metros with prices at a premium 

The latest report also points to Phoenix, Las Vegas and Stockton (in California) as three metros currently home to the most overvalued markets in the US. 

All three were among the metros that suffered most during the last property downturn in the late 2000s. Nowadays, real estate in Phoenix, Las Vegas and Stockton is between 38.5 and 42.3% higher than its value. 

“Customers buying now in these markets are paying near peak prices,” said Ken Johnson, co-author of the report. “They risk being stuck for a significant amount of time before they can realise solid returns on their real estate investments.”

Least overvalued US real estate 

Metros at the other end of the scale include Honolulu, Baltimore and Virginia Beach. In all three, houses are currently selling for less than their historical value. However, the percentages are marginal compared to the other end of the market.

While property in Boise is selling for almost double its historical value, homes in Honolulu are just 4.93% below their expected price. Real estate in Baltimore sits at almost market value (1.69% less). 

“Buyers who buy in these bottom markets should feel comfortable as home prices, on average, appear to have room to grow,” said the report. 

Renting preferable to buying 

The report comes to the conclusion that US real estate is entering the top end of the current cycle with the implication that prices will start to fall in the near future. “We think we’re entering the peak of our current real estate cycle,” said Johnson. “No one really wants to buy at the top of the current cycle. 

Instead, the report recommends that would-be buyers in the most overvalued markets in the US consider renting rather than buying for the time being. “Renting and reinvesting has been shown to often outperform ownership in terms of wealth creation,” commented Johnson. This recommendation reinforces the opportunities for buy-to-let investment in the US.

(Source: Florida Atlantic University)