‘Overvalued’ housing not a bubble about to burst, experts say
Afew years ago, “overvalued” would never have been a word that described Houston real estate. “Cheap,” “abundant” or “suburban” might have been more apropos.
But local home prices got so high in such a short period that national ratings agency Fitch released a report at the end of March pronouncing Houston as the second-most overvalued housing market in the country. The report drew even more attention earlier this month after Forbes picked it up in an online article.
While being called overvalued can trigger a negative reaction, it’s not reason to panic. And since that report was released, the market has cooled off already. And that’s not reason to panic, either.
Not Fitch, nor any of the local economists we talk to on a regular basis, think Houston real estate is in a bubble that’s about to burst.
“Alittle softening doesn’t mean we expect the market to crash,” Fitch director Stefan Hilts said.
There are some things to watch out for.
Hammered by low oil prices, Houston-area employers are expected to generate just a third as many jobs as were predicted earlier this year.
Don’t expect buyers to continue to line up to make offers on homes they saw for 10 minutes or even from a Skype call with their real estate agents.
And as builders continue to put stakes in the ground, especially in new subdivisions around the Grand Parkway, prices could soften as sellers of older homes compete with builders.
The earlier Fitch report said Houston home prices spiked a staggering 43 percent between
2011 and the end of 2014.
Hilts, a director in Fitch’s U.S. residential mortgage-backed securities group, said last week that the growth rate here has already started to slow in recent months.
“In the last quarter or two, we’ve seen that disappear,” Hilts said about Houston’s red-hot price appreciation.
The report said the gains in Houston were a result of oversized demand due to the booming economy compared with other markets where price increases are based more on low building rates and underwater mortgages that have been restricting supply.
It’s true that Houston doesn’t have an excess of underwater loans where homeowners owe more on their mortgages than their homes are worth, but supply has been severely limited.
In fact, housing inventory has been far below what is considered to be a stable level for more than three years.
The last national recession and financial crisis left builders and developers struggling to get loans to put up new homes and subdivisions.
Jim Gaines, an economist with the Real Estate Center at Texas A&M University, said Houston experienced a double whammy of being both growth and supply driven, factors that caused prices to skyrocket.
He said the recent increases are not sustain- able and likely to get lower over time as supply and demand become more balanced.
Job losses related to cutbacks in the energy industry also should lead to more moderate demand and potentially loosen the constrained inventory, he added. “If people are going to lose their jobs or maybe have some worry about it, they may start selling their homes,” Gaines said.
Houston-area employment, which averaged 100,000 new jobs annually over the past three years, could fall to as few as 13,000 new jobs this year, according to economist Bill Gilmer.
“I’d be surprised if we don’t see some real softness,” Gilmer, director of the University of Houston’s Bauer Institute for Regional Forecasting, said of the local property market.
The Fitch report, which said Houston housing was 18 percent overvalued (Austin was 19 percent), said price growth is more resilient in cities like ours where home values were growing as a result of strong economies.
For Houston housing, “there’s a downside risk, but not a crash risk,” said Hilts. Hearst Corp., the Chronicle’s parent company, has a majority ownership stake in Fitch.
Gilmer said real estate values may fall in the outlying suburbs where builders are putting up new houses.
“I’m not predicting a 20 percent decline necessarily, but I’d be surprised if there’s not some downward pressure over next 12 to 15 months,” he said.
Gaines thought the slowdown would have been more pronounced by now. Year-to-date, Houston-area single-family home sales are off just 1 percent.
“I think second half of the year will be a little more telling,” Gaines said.