A report by CoreLogic has made many investors sit up and listen with a wild suggestion that more than 50% of US homes are “overvalued”. While this latest report is attracting some interest and a range of comments, it is worth noting that the results are based purely on facts and figures as opposed to opinion. So, is the US property market really overvalued?
Recent house price performance
The annual increase in US house prices hit 7% in March 2018 and while it fell to 6.9% in April this is still a significant rise. Investment in property is still extremely popular in the US and with interest rates still relatively low (although starting to increase) many investors may be taking advantage of current rates. It is noticeable that short-term hits in investor confidence tend to turn around very quickly with investors seemingly looking to buy stocks and shares and property on any sign of weakness.
The ongoing gradual increase in US interest rates may well curtail any similar price rises in the short to medium term but do not expect a major downturn in US property prices in the foreseeable future.
Calculating affordability
The headlines suggesting that 52% of US property markets were “overvalued” in April certainly attracted attention. CoreLogic arrived at this opinion after taking into account long term local market fundamentals such as disposable income. Where the average price of property is at least 10% greater than its long-term sustainable value this is deemed to be “overvalued”. On the flipside of the coin, using the same mathematical approach, 34% of the largest US property markets are deemed to be fair value with 14% undervalued.
It is worth noting that in March the same approach revealed that 50% of US property markets were overvalued which would seem to suggest the upward trend is still intact. It is worth noting that CoreLogic recently revised upwards its expectations of house price growth in 2018 from 5.2% up to 5.3%.
Lack of supply
As with many developed markets around the world there is a distinct lack of supply when it comes to homes. There is no doubt this is causing a significant percentage of the recent house price rises as investors scramble and fight for those properties on the market. There appears to be most interest in US entry-level properties and with developers tending to focus on the luxury end this will not really help short to medium term supply problems.
It is highly likely that the ongoing increase in mortgage rates, albeit from relatively low levels, will have a cooling effect at some point. Indeed this may flush out would-be property sellers who have been holding on for the best price awaiting indications the market may have topped out. This has been the hope of many property investors for some time although in reality the market keeps going from strength to strength.
Conclusion
It is becoming more apparent across worldwide property markets that traditional measurement metrics are no longer relevant in the current low cost finance environment. The gradual increase in US base rates will at some point impact demand for property but as the figures for March and April show, a chronic shortage of supply is certainly helping to push prices to what many see as unsustainable levels. In reality a US property house price bubble is starting to emerge in some states but the authorities have sufficient tools at their disposal to hopefully deflate this in a controlled manner.